The $42 Billion Reason Turkey's Lira May Not Be Cheap Enough Yet

(Bloomberg) -- The Turkish lira hasn’t been this cheap in more than a decade, but that’s done little to correct an economic imbalance that makes it vulnerable to more losses.

Turkey’s 12-month current-account deficit widened to $41.9 billion in October, the largest since 2015, even as the currency’s real effective exchange rate (REER) slumped to the lowest in at least 14 years. REER is a trade-weighted measure of the national currency against those of its main trading partners, and a lower number would normally be expected to provide a boost to Turkish exports while deterring imports.

That’s failed to be the case though, underscoring how reliant Turkey’s economy remains on foreign cash to finance its growth. A world-beating economic expansion of 11.1 percent in the third quarter was propelled by a government-backed credit binge that’s also buoyed imports, outweighing any windfall the cheaper lira had for exporters.

The sustained demand for external financing also shows why the lira has continued to depreciate, even after the central bank pushed borrowing costs higher by about 400 basis points this year.

According to Deputy Prime Minister Mehmet Simsek on Monday, the worst of the lira losses are over. But most analysts expect at least a 100 basis-point increase to borrowing costs when the central bank meets on Thursday to ensure that prediction proves to be true, according to Bloomberg surveys.

“The rate hikes didn’t really mean tightening of domestic monetary conditions,” Inan Demir, an economist at Nomura Plc. in London, said last week. “Unless pro-growth measures stop,” the currency will need to drop further to help the current-account balance adjust, he said.

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