Lira Stays Volatile as Turkey Unveils More Measures to Stem Rot

(Bloomberg) -- Investors were torn how to respond to the latest set of measures from Turkey to quell its currency crisis.

The lira swung between gains and losses after the central bank said it would allow exporters to repay dollar-denominated loans in the local currency. The measures come two days after an emergency rate hike and underscore policy makers’ efforts to stem a rout in the lira. Fitch Ratings warned that another rate increase is possible in the next month if the exchange rate continues to be under pressure.

The lira has been one of the currencies hardest hit by an emerging-market sell-off this year amid concern the nation’s interest rates are too low given a current-account deficit and double-digit inflation. President Recep Tayyip Erdogan, who launched a re-election campaign on Thursday that may provide the toughest electoral test of his 15 years in power, favors lower interest rates to boost the economy.

Companies that took out so-called re-discount loans can make any payments scheduled between now and July 31 in local currency, the central bank said in a statement.

“It provides very short-term support and the announcement seems to have helped the lira hold its own, for now,” Nigel Rendell, a senior analyst for EMEA at Medley Global Advisors, said by email. “But it will have no lasting positive impact on the currency as it is aimed at the symptoms and not the cause of lira depreciation.”

“By Monday morning, if not before, the changes in re-discount credits will doubtless be forgotten, as have all previous CBRT gimmicks like the changes in the reserve option mechanics announced a couple of weeks ago,” he said.

The lira traded 0.5 percent lower at 4.7346 per dollar as of 12:59 p.m. in Istanbul after the central bank’s announcement. The currency has slumped more than 5 percent in the past five days, the most since October 2008, when it sank almost 30 percent in four weeks.

The yield on the nation’s 10-year bonds climbed four basis points to 14.81 percent on Friday, taking the increase for the year to 314 basis points.

What Our Economists Say

"Turkey’s currency crisis may have come to a head this month, but its origins are many years old. The root of the problem lies in low domestic savings. Turkey doesn’t save enough to finance its investment spending, which means it has to fill the gap with borrowing from abroad.”

--Ziad Daoud, chief Middle East economist, Bloomberg Economics

See Turkey Insight for more

The central bank’s 300 basis point rate hike this week was “very powerful” even though it was late, Deputy PM Mehmet Simsek said in an interview with NTV. The central bank would deliver additional measures if needed, he said.

Fitch Ratings said that policy makers would “certainly contemplate” another rate hike if the lira continues to slide. “They will act again if necessary and they have another opportunity in June,” said James McCormack, global head of sovereigns.

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