The Turkish Lira continued to decline against both the U.S. dollar and the euro on March 13 amid a series of negative developments.
The lira fell 0.7 percent against the dollar to its lowest since mid-December, dropped to over 3.86 in the early afternoon of March 13. It also fell to record lows of 4.76 against the euro.
The plunging trend resumed last week after Moody’s downgraded Turkey’s sovereign rating to Ba2 from Ba1, citing a continued loss of institutional strength and the increased risk of an external shock given its wide current account deficit.
The rating outlook was also changed to stable from negative on March 7.
On March 8, the lira fell as much as 0.4 percent to 3.81 per U.S. dollar after the downgrade.
Moody’s rating move came one day after the Turkish Central Bank kept interest rates steady, saying it would keep policy tight until price pressures eased, signaling its intention to rein in inflation.
Year-on-year inflation has cooled from the 14-year peak of 12.98 percent it reached in November 2017. But at 10.26 percent in February it remains one the main imbalances in Turkey’s economy, well above the Bank’s target of 5 percent.
Weak current account deficit data
Turkey remains one of the most vulnerable emerging markets to U.S. Federal Reserve rate rises. The lira has been the worst performing emerging currency since the beginning of the March 12 week, following the release of higher-than-estimated current account deficit data.
Turkey’s current account deficit widened by $4.4 billion year-on-year to reach nearly $7.1 billion in January, the Central Bank stated on March 12.
The gap was higher than estimates, which were set at around $6.9 billion.
According to some analysts, the decline in the lira accelerated after parliament passed a controversial law revamping electoral regulations on March 13.
The opposition said the law could open the door to fraud and jeopardize the fairness of 2019 polls. A brawl ensued in parliament after the result of the vote was announced.
İnan Demir, senior emerging economist at Nomura International, told Reuters that the law’s passing may have contributed to the negative sentiment around Turkey following the Moody’s ratings downgrade last week and the weak current account numbers on March 12.
Turkish five-year credit default swaps also widened 2 basis points (bps) from Monday’s close to 171 bps. Turkey’s 10-year local government bond yield rose to 12.75 percent, its highest since November 2017.