On June 9th, Turkey’s president Recep Tayyip Erdoğan made a significant move by appointing Hafize Gaye Erkan as the new head of Turkey’s central bank. This decision holds considerable weight as Erkan brings with her a wealth of experience, having previously served as the managing director for the prestigious American investment bank Goldman Sachs. Notably, Mehmet Simsek, a former finance minister and Merrill Lynch banker, returned to Erdoğan’s Cabinet.
President Erdoğan, in an interview with the media on June 14th, expressed his approval for a change in Turkey’s monetary policy. This statement aligns with Erdoğan’s recent hints at a potential shift in direction, a topic he has broached multiple times since his re-election.
The economic landscape in Turkey has been tumultuous, with the public budget deficit skyrocketing by a staggering 1,870% year-on-year during the first four months of 2023, according to calculations by Turkish economist Tahsin Bakirtas. Furthermore, private households are burdened with heavy debts, amounting to approximately 180% of Turkey’s gross domestic product. In the face of these challenges, the Turkish state is grappling to stay financially afloat, with its foreign exchange reserves nearly depleted. To finance a substantial account deficit and bolster the weakening lira, the central bank has expended around $25 billion this year alone. Consequently, Turkish banks have turned to banks from Islamic nations, such as the United Arab Emirates, for crucial loans. Recent reports from Bloomberg News indicate that two UAE banks, namely Abu Dhabi Commercial Bank and the state-owned Emirates NBD bank from Dubai, have provided Turkish banks with more than half of the urgently required loans.
Economists at JPMorgan Chase anticipate that Turkey’s Central Bank will substantially raise its current key interest rate of 8.5% at the upcoming meeting. Their predictions indicate that rates are likely to surge to 25% on June 22nd. Looking ahead, JPMorgan analysts even anticipate that interest rates will climb to 30% by the end of the year, underscoring the gravity of the economic situation facing Turkey.
USD/TRY is trading at 23.559 while its record high is at 23.73. If rates are going to be hiked as market participants expect the Lira has strong possibilities to make a rally, and if liquidity does not dry up, shorting a currency with such high swaps rates would be a very severe warning for position traders.
The fragile point for a bullish case for the Lira is the reliability of new measures, given the recent past of turbulence where politics won on traditional monetary theory.
