The political disagreement between the United States and Turkey is receiving a lot of media attention, in which the financial focus was primarily on the stock market in Istanbul, which dropped by almost 5%. However it is the decrease in the value of the lira that will really hurt the country, Laurens Maartens of the Dutch Betaal & Wisselmaatschappij expects.
The American President Donald Trump isn't just arguing with North-Korean leader Kim Jong-un, he is also embroiled in a disagreement with the Turkish government. The United States suspended all non immigration related visa services in Turkey on Monday. The measure is a response to the arrest of an employee of the American consulate in Istanbul. The Turkish embassy in Washington announced a few hours later that no more visas are being approved, which means the threat of a new political disagreement. On the currency markets, the lira immediately dropped over 4% compared to the Euro.
Short on running bill
The decline of the lira could cause a lot of problems for Turkey. The country is short on its running bill. This means that the value of the good and services that Turkey is importing is larger than the value of their export products. According to trade bank Macquarie the shortage is around 4 billion per month in the past quarter: the highest level since 2013. Usually the difference is financed by borrowing money from abroad. Due to the decrease in the lira this is becoming increasingly difficult. At the moment 4.34 lira can be exchanged for 1. A year ago this was 3.40 lira and ten years ago only 1.71 lira.
Doubtful reserve
At a first glance the Turkish central bank has enough reserves to finance the import of goods and services for now. The store of gold and foreign currency is valued at around $ 130 billion. A year ago, however, it was still $ 140 billion. Large amounts stored by commercial banks at the Turkish central bank are also included in this. According to a UBS calculation from earlier this year, the actual value of the currency reserve is closer to $35 billion.
Escalation
Turkey could face considerable problems if the political situation escalated. Yet the lira has recovered slightly after the original correction. That is partially to do with traders expecting both countries not to want to escalate the situation. Turkey is a member of NATO and the air force bases are of huge strategic importance to the United States. On the other hand the Turkish government in Ankara has little to win in derailing the economy. Another factor behind the recovery is the time in which the drop took place.
Asian witching hour
The decline of the lira came in the middle of the night in a rush. It happened in the so-called 'Asian witching hour'. In the two hours between the closing of the stock markets in New York and when the trade on the main Asian markets starts, there are few to no large players active. In this period the trade volume is only 2% of the turnover of that of the peak during the day. If an exchange rate is reached in the witching hour at which large parties have set their computers to take a position, a lot a supply can be created all of a sudden. During normal trading hours, market parties can play into it well, but in the witching hour it leads to strong currency movements.
Other victims
The lira isn't the first currency to fall victim to the Asian witching hour. A year ago the British pound dropped just as quickly and at the start of 2016 the South African rand was stirred. As long as the political tensions do not escalate the lira should be able to recover in the short term. But as long as the payment balance in Turkey isn't balanced and banks are questioning the quality of the currency reserve, a lot will have to happen to reverse the trend of recent years.
For more information:
Laurens Maartens
Nederlandsche Betaal & Wisselmaatschappij
Beursplein 5
1012 JW Amsterdam
Tel: 0031 (0) 20-5782434
Laurens@nbwm.nl