www.zerohedge.com
It has been an miserable five years for Turkish citizens who have
seen their purchasing power slashed by more than half, and it's only
getting worse.
The Turkish lira has cratered against the dollar and most developed
currencies, plunging from 3 TRY per dollar, to a record low 7.37 last
week after a brief and valiant attempt at imposing shadow capital
control by Erdogan (who is now de facto head of the Turkish central bank) failed miserably at the end of July, and not even a draconian hike in overnight funding rates above 1000% last week (to crush the shorts) was able to prevent a plunge in the Lira to new all time lows.
As their currency implodes (in a nation that is becoming increasingly
more "banana" with each passing day as Erdogan solidifies his takeover
of every government institution, in the process turning off any
potential foreign investors) Turks are discouraged from material
purchases of dollars to hedge the collapse in their native currency due
to some of the strictest capital controls on the planet, which has left
them with just one option.
As Reuters reports, Hasan Ayhan followed his wife’s instructions last week and took their savings to buy gold at
Istanbul’s Grand Bazaar as Turks scooped up bullion worth $7 billion in
a just a fortnight while their currency went up in flames.
The retired police officer, hit by vivid memories of the 2018 currency
crisis which saw the Lira lose 30% of its value virtually overnight, was
among those playing it safe as he queued in the city’s sprawling
covered market, where a screen showed the gold price rise by one Turkish
lira ($0.1366) in just 10 minutes.
What's more, it now appears that locals are choosing gold over the
dollar, perhaps because the dollar has also been tumbling against gold
in recent weeks due to the Fed's overt attempts to debase the greenback.
"I think it is the best investment right now so I converted my dollars to buy gold," the
57-year-old said, adding: "I might withdraw my lira and buy gold with
it too, but I am scared to go to the bank right now because of
coronavirus."
Well, Hasan, for people in Turkey it is the best investment, but
there is a rather high chance that Erdo pulls an FDR and makes it
illegal for anyone in Turkey to own gold so you and your fellow
countrymen may want to have a series of unfortunate boating accidents in
the coming weeks.
In any case, the day after Ayhan bought his gold on Aug 6, the lira
hit a historic low and has continued to slide, laying bare concerns that
Turkey’s reserves have been depleted by market interventions, which are
showing signs of fizzling out, even as the central bank and president
flood the local airwaves with fake news about monetary stability and
urge locals to keep their money in lira.
Only this time it's not working: turks have traditionally used gold as savings and there may be as much as 5,000 tonnes of it "under mattresses", with more added after the recent buying spree, Mehmet Ali Yildirimturk, deputy head of an Istanbul gold shops association, said.
And although gold has never been more expensive - in either lira or
dollar terms - vendors at Istanbul's Grand Bazaar said almost no one is
coming to sell their gold jewellery. There are only buyers.
"I’ve been chatting with hundreds of people who are thinking about selling their cars or houses to invest in gold," said Gunay Gunes, whose busy booth is near the market’s entrance.
Putting the recent gold-buying frenzy in context, in just the last three weeks, as selling gripped the lira local
holdings of hard assets such as dollars and gold jumped $15 billion to a
record of nearly $220 billion, making a mockery of the central bank's
attempts to halt the currency slide.
The good news is that, according to Reuters, so far there is no
evidence suggesting people are about to pull savings from banks, and
this week the lira has hovered around 7.3 versus the dollar, although it
remains among the worst emerging-market performers this year. Demand
has eased since Turks withdrew some $2 billion in hard foreign cash from
their banks during a March-May period in which a lockdown was imposed
and the lira hit its last low, according to central bank banknote data.
But that will surely change should the freefalllin the lira
accelerate. Indeed, analysts say that if Ankara cannot boost confidence
in the currency, which has fallen almost 20% this year, import-heavy Turkey risks inflation and even a balance of payments crisis that will worsen fallout from the coronavirus crisis. It also guarantees even more weakness for the lira, and even more buying of gold.
Meanwhile, with foreign investors now having only a small stake in
Turkish assets after the government's authoritarian approach has spooked
many of them away, it is critical for President Tayyip Erdogan to
convince Turks and local businesses to stop turning to the perceived
stability of dollars and gold. One look at the chart above suggest
that's not working.
Meanwhile, Finance Minister Berat Albayrak - who just happens to be
Erdogan’s son-in-law - said on Wednesday the lira’s competitiveness is
more important than exchange rate volatility. The central bank has
effectively borrowed on local dollar liquidity to fuel its foreign
exchange market interventions, which are meant to stabilize the lira,
according to data and the calculations of traders and economists.
Through Turkish state banks, which together are "short" foreign exchange by $12 billion, the central bank has sold more than $110 billion since last year, Reuters data show. In turn, the bank’s gross FX buffer has fallen by nearly half this year to below $47 billion, its lowest in 14 years.
While the CBRT has downplayed the plunge in reserves, saying the
"fluctuate" in stressful periods with the Treasury chiming in to say say
the bank intervenes at times to stabilize the currency, ratings
agencies and investors say Ankara should take decisive steps such as an
interest rate hike to rebuild reserves and restore confidence.
Otherwise, rising current account deficits and a possible debt default
could tarnish the country's formerly solid reputation for meeting
foreign obligations.
And, as Reuters notes, these debt repayments are set to rise in
October, but the local aren't waiting the 2 months to see how the
current crisis plays out.
"Locals don’t want to keep Turkish lira, they’ve been
dollarizing and buying gold. Turks have hardly ever done that
historically," said Shamaila Khan, New York-based head of EM
debt strategy at AllianceBernstein. "That is why you need proactive
policies because if you get to that stage where locals are unwilling to
keep their money in the bank then you’re heading to a balance of
payments crisis. That’s when the alarm bells will start ringing."
To halt the bank runs, some banks imposed fees on withdrawals this
week, while the central bank has curbed cheap credit channels it had
opened to ease the coronavirus fallout. Yet while lira deposits now earn
more than the 8.25% policy rate their real return is negative with
inflation at 11.8%.
Perhaps Erdoganomics, whereby the president mandated to "fight" high inflation with lower rates in contravention of all norms and rules of economics, will ultimately end up destroying Turkey just as so many expected.
Or maybe not: traders say backdoor tightening needs to reach 11.25%
to stabilize the lira, which has nearly halved in value since early
2018, sowing anxiety over diminished living standards in a country
accustomed to free trade and travel; still Erdogan is firmly against
higher rates claiming they slow down the economy, so instead the result
has been currency destruction, because at the end of the day one can't
simply "order" economic prosperity.
Meanwhile, Erdogan shows no sign of budging, and on Monday he said he hoped market rates would fall further "god willing."
But firms such as System Denim, which imports some materials and
makes clothes for foreign companies like Zara and Diesel, are feeling
the pinch from rising investment costs. Owner Seref Fayat said he
recently converted his 4% euro-denominated loans to lira at 10%.
"No need to take on additional FX risk," he said. "Now I pay a higher rate, but at least I can see ahead."
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