Turkey’s currency tumbled 9% on Monday, putting it on course for its biggest single-day selloff since 2018, following the abrupt ouster of the central bank governor last week.
The lira fell to as low as 8.280 a dollar from 7.219, before regaining some ground to trade at about 7.9312 a dollar, according to FactSet. Turkey’s stocks also plunged.
The turmoil comes after President
Recep Tayyip Erdogan
on Friday unexpectedly fired
the central bank governor who had repeatedly raised interest rates in an effort to tame inflation since his appointment in November. Foreign investors say the move renewed concerns that the central bank has lost its independence from political influence, diminishing policy makers’ credibility and sapping appetite for Turkish assets.
The new governor,
Sunday tried to reassure markets by saying taming inflation is the bank’s main objective. He also pledged to foster economic stability by lowering borrowing costs and bolstering growth. Money managers are concerned that he may allow the currency to depreciate, and accept elevated inflation levels, to lower interest rates.
“We’re really trying to gauge what the level of commitment to the lira is,” said
senior foreign exchange market analyst at broker Monex Europe. “We know in Turkey that interest rates are politically sensitive.”
Turkey’s benchmark Borsa Istanbul 100 stock index plunged by as much as 9.4% Monday, putting it on course for its sharpest selloff since June 2013 and triggering two trading halts. The Nasdaq-listed iShares MSCI Turkey exchange-traded fund fell 17.5% in premarket trading.
The tumult within Turkey’s financial markets highlighted the risks of investing in emerging markets, but showed muted signs of spilling over for now. The Mexican peso and South African rand edged down slightly against the dollar.
Shares in Spanish bank
fell over 6% in Madrid. Turkey accounts for more than 10% of profit for BBVA through its 49.9% stake in Turkish bank
according to Jefferies.
The lira had been one of the best-performing emerging-market currencies this year as investors cheered the recent interest rate increases. Overseas money managers had added a net $4.6 billion to Turkish stocks and local currency bonds during Mr. Agbal’s tenure, betting that higher interest rates would help limit inflation and stabilize the lira.
Before Mr. Agbal’s appointment at the central bank, investors sold Turkish assets for much of 2020 as low interest rates and high credit expansion increased imports. The currency weakened, prompting multiple rounds of intervention to stabilize the lira even as investors speculated that the currency would continue to depreciate. The central bank at one point sold its own reserves and those borrowed from domestic banks to such a degree that it owed more foreign-currency reserves to the banks than it possessed.
More on Turkey’s Economy
Mr. Kavcioglu, the Turkish central bank’s fourth chief in less than two years, is a former member of parliament from Mr. Erdogan’s Justice and Development Party and columnist for the pro-government newspaper
He has publicly sided with Mr. Erdogan’s preference for lower interest rates.
Mr. Agbal’s dismissal came on the heels of a Thursday rate increase that surpassed expectations and pushed lending rates to 19% from 17%.
The prospect of a renewed rate-cutting cycle under Mr. Kavcioglu is prompting concerns about the country’s prospects.
The cost of insuring Turkey’s government debt against default leapt sharply Monday, rising to an annual cost equivalent to $476,000 for every $10 million of bonds over a five-year contract. That is up from $306,000 at Friday’s close, according to IHS Markit, and is the highest it has been since early last November.
“It is as complete a surprise as I can remember in 20-plus years of doing this job,” said
an investment director at GAM Investments in London, who manages emerging-market debt funds. He had bet on the appreciation of the lira in recent months through forward currency contracts, which are agreements to buy or sell a currency at a predetermined rate on a specific date.
Mr. McNamara said he expects high volatility in the lira this week as he and other investors await more clarity on Mr. Kavcioglu’s policies.
Some investors also grew concerned that Turkey would restrict their ability to sell local assets to stem the market turmoil. Lütfi Elvan, Turkey’s Minister of Finance and Treasury, issued a statement Monday indicating that Turkey wouldn’t impose capital controls or determine a fixed exchange rate.
Any cuts to interest rates may not be made immediately. In Mr. Kavcioglu’s statement Sunday, he said the schedule for monetary policy meetings, where benchmark rates are set, will remain unchanged. The next meeting would be on April 15.
“If you’re committed to the meeting schedule, then you don’t have a meeting this week to cut interest rates, so there’s a short reprieve for investors,” said
an emerging-markets fund manager at Aberdeen Standard Investments who had bought lira-denominated bonds under Mr. Agbal’s tenure.
“The next move will definitely be down,” Mr. Curtis added. “The question has been, when are rates going to go down, and how far.”
and Paul J. Davies contributed to this article.
Write to Caitlin Ostroff at [email protected]
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