Turkish Lira dropped to 7.85-86 range vs the American dollar, as the Turkish Republic of Northern Cyprus decided to open the ghost town of Varosha to Turkish settlement, while Military Chiefs of Staff decided to test Russian-made S-400 missile systems next week. Political calm at home and abroad gave way to renewed uncertainty and turbulence, as the specter of partial elections emerged on the horizon, while EM rally stalled because of Trump ending financial support package negotiations.
Turkey’s lira hit a record low against the U.S. dollar on Wednesday as souring relations between Ankara and Brussels added to the country’s geopolitical woes, while broader emerging market currencies steadied despite a delay in new U.S. stimulus.
The lira sank as much as 1% due to lingering concerns over the Caucasus conflict and possible U.S. sanctions, while the European Union said chances of Turkey’s potential entry into the bloc were evaporating.
The currency is one of the worst performers among its emerging market peers so far this year, having shed nearly a third of its value.
The tourism-dependent Turkish economy has been hit hard by the COVID-19 pandemic. Elevated inflation levels and a second wave of coronavirus cases worldwide are expected to hamper the country’s fledgling recovery.
“It’s a perfect storm at the moment hitting Turkey… It’s one of the most vulnerable emerging markets out there due to a very fragile institutional setup and very large external funding needs,” said Jakob Christensen, chief analyst, head of EM research at Danske Bank, wrote Reuters.
The decision by the military to test S-400s anti-missile systems, disappointed US State Department, which curtly stated:
“The US State Department is “deeply concerned” about reports that Turkey is planning to conduct a test of the Russian-made S-400 missile defense system at a site in Sinop province on the Black Sea coast.
“We are aware of these reports. We continue to object strenuously to Turkey’s purchase of the S-400 air defense system, and are deeply concerned with reports that Turkey is continuing its efforts to bring the S-400 into operation”. Markets are afraid the Congress will re-enact CAATSA sanctions against Turkey.
In a second move which is likely to anger UN, Greece and EU, the President of the Turkish Republic of Northern Cyprus, Mr. Ersin Tatar decided to open the Varosha township tomorrow, which had been closed down to commerce and settlement until reunification is achieved. The sudden decision also triggered turbulence in TRNC, as one of the partners of the governing coalition, The Party of the People resigned, effectively causing the administration to lose majority in the parliament.
According to Turkish press reports, the Chief Prosecutor of Ankara petitioned the office of the Speaker of the Grand Assembly to lift the immunities of 26 sitting MP, which if ratified by the general floor, could precipitate mid-term elections to fill the vacant seats.
Further depreciation of the lira is certain to fan the flames of inflation, as well as trigger bankruptcies and loan defaults among the heavily FX indebted private sector.
The Turkish economy has picked up substantially since the start of the summer with the easing of lockdown restrictions in early June.
Nevertheless, already existing woes such as high inflation, unemployment, foreign-denominated corporate and private debt, and also a widening current account deficit, have been exacerbated due to the pandemic.
Consumer price inflation edged slightly down in September to 11.75 percent year-on-year, from 11.77 percent the previous month, the country’s national statistical body announced Monday.
Recent survey data reveals that Turkeys recovery slowed down to stall speed in September, which currency weakness and policy uncertainty is likely to exacerbate.
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