The Turkish lira hit new lows against the U.S. dollar on Wednesday, triggering growing concerns about the country’s economic stability. One of the factors contributing to the lira’s decline is the report stating that state lenders have stopped selling dollars to defend the currency. This sudden halt in currency defense raises questions about the new finance minister’s ability to tackle the challenges ahead.
Concerns arise over the Turkish lira’s decline and the new finance minister’s ability to stabilize the currency amid inflation and policy changes
The USDTRY exchange rate soared to 23.133 against the lira, marking a significant drop of 6.3%. As investors sought refuge from high inflation, they poured money into Turkish stocks, driving the BIST index up by 3.2% and achieving a remarkable 117% gain over the past 12 months.
However, the iShares MSCI Turkey ETF, which tracks Turkish equities, experienced a decline of nearly 3% during premarket trading on Wednesday, reflecting the growing concerns about the country’s economic prospects.
According to Bloomberg, state lenders have shifted their stance and are no longer actively propping up the lira through dollar sales. This change could be seen as a response to the new finance minister’s commitment to implementing a more rational economic policy and allowing the currency to float more freely. However, the state banks themselves have not commented on these market interventions.
Reuters reported that the decline in forex and gold reserves, which had been observed in the previous week, has now halted. The government has utilized billions of dollars to support the struggling lira, indicating the extent of the challenges facing the country’s financial stability.
The lira’s downward trajectory has persisted since the re-election of President Recep Tayyip Erdoğan and the appointment of Finance Minister Mehmet Şimşek, who previously held the same position from 2015 to 2018. Many believe that a comprehensive transformation within the central bank will also be necessary to address the economic situation effectively.
Erdoğan, despite facing criticism for his economic management and response to recent earthquakes, has advocated for substantial cuts in borrowing costs, holding the view that these measures will alleviate inflation. The central bank has gradually reduced its policy rates from around 20% in 2021 to the current 8.5%. However, inflation has remained alarmingly high, reaching nearly 40% in May and peaking at over 85% in October.
Mehmet Şimşek, a respected figure in the financial sector, has been tasked with cleaning up the economic mess accumulated over the past year and a half, as well as restoring investor confidence. However, rebuilding trust won’t be an easy task.
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Ipek Ozkardeskaya, a senior analyst at Swissquote Bank, highlighted the need for Şimşek to withstand pressure from the presidential office to maintain low interest rates. The challenge lies not only in Şimşek’s financial expertise but also in his ability to resist unfavorable policies that benefit intermediaries and associates of the president.
The recent 10% drop in the lira, as noted by Timur Kuran, an economics and political science professor at Duke University, can be attributed to multiple factors. Kuran emphasized the inability of the central bank to defend the lira due to depleted foreign reserves.
Furthermore, uncertainties surround the extent of Şimşek’s authority, given President Erdoğan’s decision-making tendencies. It remains unclear whether Şimşek will be able to implement policies that are optimal for the economy, especially when faced with potential resistance from beneficiaries and even the president himself.
Conclusion
The road ahead for Mehmet Şimşek is fraught with challenges, and the outcome of his battles to stabilize the economy remains uncertain. The Turkish lira’s decline and the government’s response to economic pressures will determine the country’s future financial stability and the faith of investors in its economy.
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