Turkey's economy faces growing risks as it enters a downturn with dwindling reserves and a fragile lira, financial markets signaled 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.
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 below $26 billion last week from more than $40 billion at the beginning of the year.
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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.
Turkish parliamentarians wearing face masks visit the mausoleum of Turkey's founder Mustafa Kemal Ataturk during a ceremony marking centennial celebrations for the founding of the Turkish parliament, which is also National Sovereignty and Children's Day, in Ankara, Turkey, on Thursday, April 23, 2020. (AP)
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. The lira has fallen 14 percent 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.
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Turkey has the fiscal capacity to spend more to absorb shocks in the economy, David Hauner at Bank of America Merrill Lynch wrote in a note.
But it “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.
The risk of a default in the next five years is at 600 basis points and near an all-time high touched earlier this month, while the 12-month CDS traded at 438 basis points.
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Turkey's “large external financing requirements, low foreign exchange reserves and weak monetary policy credibility...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 rose on Friday to near one-year highs even while they fell in energy-producing EM currencies, like Russia's rouble and Mexico's peso, after a modest rebound in oil prices over the last few days.