A rally yesterday in Turkey’s currency after the central bank carried out its first unscheduled intervention in more than two years wasn’t enough to stop it setting new all-time lows later, and then again today. Investors are speculating the central bank’s efforts to prop up the lira by plowing through foreign-exchange reserves will prove futile without raising interest rates.
The lira plunged to a record 2.3296 per dollar, and was 1.5 percent weaker at 2.3271 as of 11:30 a.m. in London. It also set an all-time low of 3.1968 per euro. Turkey’s central bank refrained from raising benchmark rates this week, fueling concern that it will be difficult to finance current-account deficits.
Turkey holds about $33 billion in foreign reserves, excluding deposits from commercial banks, only enough to cover 1 1/2 months of imports, according to Citigroup Inc.
‘Bad Storm’
“It’s a bad storm,” Neil Azous, the founder of Rareview Macro LLC, a Stamford, Connecticut-based advisory and research firm, said in a phone interview yesterday. “Their net foreign- exchange reserves are dwindling pretty fast. They’re definitely in the danger zone. If you’re a money manager, the responsible action is to take some measures to reduce risk.”
The International Monetary Fund predicts that the growth advantage of emerging markets over advanced economies will shrink this year to the smallest since 2001. The Washington- based institute kept its expansion forecast for developing countries this year at 5.1 percent on Jan. 21, while raising the outlook for advanced economies to 2.2 percent, from the 2 percent estimated in October.
China is struggling to contain $4.8 trillion in shadow- banking debt, raising concern about the growth outlook for a country that buys everything from Chile’s copper to Brazil’s iron ore. A corruption investigation is embroiling Turkish Prime Minister Recep Tayyip Erdogan’s cabinet, while deadly protests in Ukraine and Thailand are eroding confidence in the political stability of developing nations.
‘Gradual Erosion’
“The gradual erosion of sentiment for the EMs, owing to the perception that several EM economies or countries are ‘on the brink,’ simply made the run on reserves in Argentina and the poor China data the ‘straws that broke the camel’s back’,” Thierry Albert Wizman, a strategist at Macquarie Group Ltd. in New York, wrote in an e-mail to clients yesterday.
A Bloomberg customized gauge tracking 20 emerging-market currencies fell to 89.6 today, the lowest level since April 2009. The index has tumbled 9.9 percent over the past 12 months, bigger than any annual decline since it slid 15 percent in 2008.