The lira’s annus horribilis is nearing an end.
Turkey’s battered currency is on course to suffer its worst annual slump since the height of the financial crisis in 2008, according to data from Reuters, plunging 20 per cent against the dollar and stumbling from one record low to the next in the second half of the year.
Close to 20 terror attacks, one failed military coup and the prospect of tighter US monetary policy to come, have made for a tumultuous year for an economy that was once an emerging market darling
But political risk returned with vengeance in 2016.
Turkey’s dominant president Recep Tayyip Erdogan has embarked on an unprecedented attempt to centralise power in his office following a botched coup attempt in July, purging over 100,000 officials from the civil service, military and judiciary in a wide-ranging crackdown on political opposition.
Mr Erdogan is now readying himself for a major reform of Turkey’s constitution which would strengthen the office of the presidency and clear the way for him to rule the country for the next 13 years.
The lira is unlikely to take much solace in 2017 as the measures are put to a referendum next year. Among its emerging market peers, Turkey’s year to date slump is eclipsed only by the Argentine and Mexican pesos in 2016, according to data from Bloomberg.
On December 2, the lira touched an all-time record low of TRY3.5840 against the dollar – a 29 per cent plummet from its 2016 high at the start of May.
A plunging currency is particularly problematic for a country like Turkey, long vulnerable to any sudden withdrawal of foreign capital on the back of a hefty current account deficit that relies on a steady inflow of overseas investment to fund.
Foreign investors dumped $2.6bn worth of Turkish bonds and equities in November, while private sector companies (excluding banks) owe $210bn in foreign currency liabilities. The cost of servicing this debt becomes more burdensome the further the lira slumps.
Away from the markets, things in the real economy don’t look much brighter. Official figures shows Turkish GDP contracted at its worst quarterly pace since 2009 in the third quarter driven by sharp drops in consumer spending.
Due to recent revisions in the way Turkstat collects its GDP numbers, the -3.8 per cent quarter on quarter figure was not seasonally adjusted. Calculations from Commerzbank suggest the quarterly slowdown was a far worse -4.5 per cent – a “shocking” performance, says Lutz Karpowitz at the German bank.
As a major energy importer, Turkey also faces a double whammy of higher import costs for energy, which will push up its current account deficit and further stoke inflation.
This cocktail of developments – coupled with a Trump-induced monetary tightening in the US – are all set to exert further downward pressure on the lira in the 12 months ahead.
Get alerts on Turkey when a new story is published