Why is US dollar TL rate climbing again despite government’s efforts to prevent it?
The depreciation of the TL against US dollar is once again at the top of the economic agenda in Turkey nowadays. The rate today (01 August 2020) is close to 7 TL. Why is the pressure on TL increasing again? Down below we can see five items that show why said pressure on TL is so intense.
Decreasing reserves of the Central bank
The authority needs to have ammunition to support the currency. “How much ammunition the central bank has left” is an important point on the agenda.
According to official data, CBRT’s international net reserves are around $ 30 billion. However, according to analysts ‘ calculations, the figure turns negative when swap mechanisms, gold supplied from domestic banks and other mechanisms are removed.
Some experts say “If we look at the pace of the reduction in reserves this year, we anticipate that the CBRT will have used its gross reserve by the end of the summer or autumn”
Declining interest rates
The easing cycle that has been going on in monetary policy for a year has led real interest rates to decline. This has led investors to question whether TL assets have achieved sufficiently high returns during periods of increased stress.
The Central Bank, which held its interest rate steady this month after June, also raised its year-end inflation forecast yesterday. It is now being wondered whether the Central Bank will adopt a tighter monetary policy.
Economic troubles
Turkey’s economy is expected to contract for the first time in more than 10 years in 2020. According to the IMF, the corona virus outbreak is expected to cause a 5 percent contraction in the Turkish economy. S & P Global estimates the government will announce a record budget deficit of as much as 5 per cent of GDP.
However, there is still hope. Industrial production contracted less than expected in May, even if still negative, and lower crude prices are expected to support oil-importing Turkey.
Credit/loan issues
The depreciation of the TL makes it difficult for the Turkish government and companies to repay foreign currency debt. S & P Global said foreign exchange loans accounted for about 37 percent of total loans as of April, and it considered this a significant risk for the country’s banks.
Politics and power games
First of all, TL has been under the influence of politics for a long time.
Some political issues are, “the escalation of tensions in Turkey’s U.S. relations based on purchase of S-400 missile systems from Russia, tension with Russia in Syria and Libya, and the issue of migrants with the European countries as well as oil and the problem of gas exploration rights near the island of Cyprus”.
On the other hand tighter controls on the foreign exchange market and the government’s push for lower interest rates are also increasing the pressures on the TL.
