Turkish policymakers are ill prepared for the rainy day they now face. The lira is hitting record lows, but the central bank’s foreign-exchange reserves are too depleted to prevent further losses. Companies that are saddled with foreign-currency debt will end up paying the price.
The lira is at its weakest ever against the dollar, surpassing the August 2018 crisis that hammered the economy. The coronavirus has been tough for emerging markets in general, but Turkish asset prices are faring particularly badly. The governor of the central bank, Murat Uysal, cut rates under political pressure after taking office in July and then burnt through foreign-exchange reserves to limit the damage that his policy was doing to the lira. Now, the virus-related economic slowdown makes easing necessary, but his war chest is too depleted to offer the lira much support.
Turkey’s net foreign-exchange reserves fell to $25 billion as of April 24, from more than $40 billion at the start of the year. Uysal may stop lenders from withdrawing the dollars they have parked at the central bank. Still, past use of derivatives called foreign-exchange swaps means his scope to do this may be more limited than it appears. And President Tayyip Erdogan could call in favours from allies. Qatar, diplomatically isolated because of tensions with Saudi Arabia, could expand its $5 billion swaps arrangement with Turkey. But a blank cheque is unlikely when oil is so cheap.
Erdogan may therefore have to accept a weaker lira. That will cause headaches for any Turkey entity that has issued debt denominated in foreign currencies. The government has $2 billion of such bonds maturing this year and will probably be able to raise enough on international markets to meet its obligations. Turkish companies may struggle to do the same. As of February, non-financial businesses had more than $70 billion worth of external debt due in the next 12 months, according to central bank data. Many will struggle to cope without help from a government that is strapped for foreign currency itself. They may be the ones that end up paying for the sins of policymakers’ past mistakes.