The Turkish lira swung on Monday after President Recep Tayyip Erdogan’s threat to expel 10 western ambassadors added to intense pressure on the currency, triggered by worries over the country’s economy.
The currency fell as much as 2.8 per cent from Friday’s level to TL9.85 early on Monday morning in Asia, a time when light trading volumes can exacerbate the scale of currency market fluctuations. The lira recovered nearly all of its losses by the late afternoon session in London, but remains down by about 7 per cent for the month to date.
The latest tumult came after the Turkish leader signalled last week that envoys from the US, Germany, France and seven other countries would be forced to leave, escalating the risk of a new crisis in Turkey’s already deeply strained relations with the west. On Saturday, Erdogan appeared to double down on that warning, saying he had ordered them to be declared “persona non grata”.
However, by Sunday night the ambassadors still had not received formal notification from Turkish authorities. Diplomats are expecting the issue to be discussed at a meeting of the Turkish cabinet on Monday afternoon.
Turkey’s state-run Anadolu news agency said that Erdogan “welcomed” statements published on Twitter by several western embassies, citing presidential sources.
A short while earlier, the US embassy had published a tweet restating its commitment to Article 41 of the Vienna Convention, which sets out the duty of diplomats “not to interfere in the internal affairs” of a state where they work. Canada, Netherlands and New Zealand all shared a similar message, while Norway, Sweden, Denmark and Finland retweeted the US post.
The Turkish president’s threat to expel the diplomats came after 10 countries published a joint declaration last week that called for the release of the jailed businessman and philanthropist Osman Kavala.
Wolfango Piccoli, co-president at the consultancy Teneo, said that while it could be difficult for Erdogan to walk back from such strong public remarks, it was “not a given” that the president would follow through on them.
He added that the countries involved made up half of Turkey’s top 10 trading partners and the expulsion of the diplomats would not only put intense pressure on the lira but would also trigger “the worst crisis between Turkey and the western world since the [ruling AKP party] got into power in 2002”.
Emre Peker, an analyst at Eurasia Group, predicted that Erdogan would go ahead with the expulsions and warned of the implications for the country’s $765bn economy, which is already suffering from 20 per cent annual inflation and a volatile currency.
“These developments would compound economic problems for Turkey, likely fuelling the dollarisation trend [of Turkish residents saving in foreign currency], potentially stoking a disorderly currency depreciation,” Peker wrote in a note to clients. “Given Erdogan’s insistence on pursuing unorthodox monetary policies, Ankara would struggle to appropriately respond to mounting economic pressures, for example by hiking rates, raising the risk of a more severe market disruption.”
The lira has already lost almost a quarter of its value since the start of 2021, as Erdogan has pressured the central bank to push ahead with rate cuts despite rising inflation.
The severe depreciation has raised concerns among investors about the risk of a balance of payments crisis, given the country’s large external debt and its low foreign exchange reserves.
In an update published on Friday, the rating agency S&P said that, although it had somewhat improved over the past year, Turkey’s balance of payments position remained “weak”.
The central bank’s “usable” reserves — once borrowed money is excluded — stand at just $34bn. That compares with $170bn of foreign debt that must be rolled over in the next 12 months.
Those risks were partially offset, it said, by Turkey’s strong fiscal position compared with many other emerging markets.
Additional reporting by Adam Samson in London
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