By Jonathan Spicer
ISTANBUL (Reuters) – Turkey’s economy faces growing risks as it enters a downturn with dwindling reserves and a fragile lira, financial markets signalled on Friday, as data showed factories slowing due to the coronavirus outbreak.
For the first time since the worst day of a currency crisis in 2018, the Turkish lira on Wednesday briefly breached 7 versus the dollar after the central bank slashed rates twice as much as expected. It
Traders have pushed up the odds of a default on government debt in the next 12 months, reflecting unease with a drop in the central bank’s net reserves to $26.3 billion this month from some $40 billion at the beginning of the year.
Turkey faces the combination of high external debt of some $170 billion this year, an inability so far to secure a foreign funding source, and the rising costs of girding the economy for fallout from the pandemic.
Turkey can spend more to absorb shocks in the economy, David Hauner at Bank of America Merrill Lynch wrote in a note.
But the country “remains vulnerable to market volatility and a stronger dollar in particular with high external financing needs. A lack of policy clarity further holds back the credit profile”, he said.
PLUNGING CONFIDENCE
Business confidence among Turkish manufacturers tumbled to 66.8 points in April from 99.7 a month earlier, central bank data showed. The bearish view was reflected in the capacity utilisation rate, which dropped to 61.6% in April from 75.3%.
Trade, spending and consumer confidence – which declined to its lowest on record this month – have also stumbled since measures taken to slow the spread of the coronavirus have pushed Turkey’s economy toward its second recession in less than two years. [nL8N2BP2M9]
To curb a surge in cases of the COVID-19 lung disease, the government has imposed partial stay-at-home orders, closed restaurants, cafes and schools, largely shuttered borders and slowed domestic movement.
The risk of a default in the next five years
Central bank reserves have thinned in large part because of state banks’ market interventions to stabilize the lira that began just over a year ago but ramped up in recent months even while the lira has fallen 14% so far in 2020.
State banks have sold nearly $20 billion in interventions this year through mid-April, according to central bank data and bankers’ calculations. One trader said there were signs of heavy resistance by state banks at 7 versus the dollar this week.
“Turkey’s main exposure to the crisis is through its large external financing requirements, low foreign exchange reserves and weak monetary policy credibility, which make it vulnerable to market sentiment, (and) we are seeing some stresses,” Douglas Winslow, Fitch Ratings head of European sovereigns, said on Thursday.
Shorter term gauges of lira volatility
(Reporting by Daren Butler, Nevzat Devranoglu, Marc Jones and Karin Strohecker; Writing by Jonathan Spicer; Editing by Mark Heinrich)
