by Elton Gomes
Turkey’s currency and stock market took a massive plunge on Monday after it was weighed down by investor fears about the country’s economic policies and worsening relations with the United States of America. The Turkish lira fell as low as 6.89 to the American dollar on Monday. The decline was about seven percent on that day and a staggering 45 percent since the start of 2018.
Why is the lira falling?
One reason could be attributed to the rise in cheap borrowing rates in major economies like the US, thereby attracting investors’ money away from economies like Turkey. Ultra-low interest rates in the US and Europe had for long encouraged companies in Turkey to borrow in foreign currencies.
This practice helped the economy, which registered a seven percent growth in 2017. However, as the US Federal Reserve increases rates, capital was drawn away from Turkey, thereby weakening its currency.
Furthermore, Turkey’s economy is struggling with high levels of debt in the private sector and significant foreign funding in its banking system. Turkey reportedly relies on foreign-currency debt more than any other major emerging market. Approximately 70% of Turkey’s economy constitutes corporate, financial, and other foreign currency debt.
Data from the Bank for International Settlements (BIS) states that Turkish borrowers owe Spanish banks $83.3 billion; French banks $38.4 billion; Italian banks $17 billion; Japanese banks $14 billion; UK banks $19.2 billion; and the United States about $18 billion. To add to this, Turkey’s inflation rose to an annual rate of 15.9 percent in July – an increase of more than five times the average rate for wealthy nations.
Amidst news of the lira plummeting, there might be a ray of hope for Turkey. On Tuesday, the Guardian reported the lira has recovered some of its losses as India’s rupee becomes the new focus for investors’ concerns. The report mentioned that after days of considerable loss, the lira rose to 5 percent to 6.53 to the dollar on Tuesday morning.
How a depreciating lira affected the Indian rupee
Global markets were already jittery in the wake of a trade war, and a falling lira only worsened the situation. Investors have several reasons to worry as emerging economies can be extremely vulnerable amidst a declining lira.
The rupee closed at 69.90 on Tuesday due to the lira declining. “The fall in rupee is in line with global decimated emerging markets currency, accentuated by the Turkish crisis,” Sanjiv Bhasin, executive vice president of markets and corporate affairs, told the Times of India.
Gaurang Somaiya, a currency Analyst at Motilal Oswal Securities, said, “”Rupee fell to fresh record low levels after Turkey’s widening diplomatic spat with the US prompted fresh turmoil in the market. Strength in the dollar against its major crosses is also weighing on the Asian currencies including the rupee,” the Hindu reported.
Dealers were of the opinion that the Reserve Bank of India (RBI) intervened to reduce the pace of the fall. But a significant level of intervention seems unlikely as factors affecting the rupee are coming from external sources. The RBI will be discomforted under such circumstances. A treasury official from a public sector bank predicted that the rupee could fall to 70 against the dollar soon, as the lira sparks fears of a global meltdown.
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