Turkish Lira Firms, But Inflation Fear Lingers

The Turkish lira gained slightly against the dollar on Monday as markets reopened after last week’s holiday, with investors set to refocus on a bitter dispute between Ankara and Washington over an American pastor being tried in Turkey.

The lira, which has weakened 37% against the US currency this year, firmed to 5.990 from Friday’s close of 6.00—the same level at which it stood a week ago when Turkish markets closed for the Muslim festival of Eid Al-Adha, Reuters reported.

The slide has been driven by investor concerns over President Tayyip Erdogan’s grip on monetary policy and the standoff with Washington over the fate of pastor Andrew Brunson, being tried in Turkey on terrorism charges that he denies.

In his first comments on the currency crisis since before the holiday, Erdogan said on Saturday the commitment and determination of Turks was the guarantee needed to combat attacks on Turkey’s economy.

US President Donand Trump’s national security adviser, John Bolton, said Ankara had made a “big mistake” by not freeing Brunson and voiced skepticism about Qatar’s offer of $15 billion in investment support for Turkey.

Meanwhile, Turkey is facing the prospect of a leap in inflation this year and a sharp contraction in its economy in 2019 as the country’s currency crisis continues, according to analysts at S&P Global.

“The exceptional volatility of the lira exchange rate over the past two weeks and a significant tightening of both external and domestic financing conditions, as well as a broader decline in confidence will, we believe, undermine the Turkish economy,” S&P said in a research note.

“We project that after average growth of more than 5% over the past three years, the economy will contract by 0.5% in 2019, with both consumption and investments reducing sharply, the latter by a projected 6%. At the same time, we project that inflation will peak at above 20% and the unemployment rate will rise to 12% next year,” S&P, the US agency that rates countries’ and corporates’ creditworthiness, added.

S&P said: Qatar’s $15 billion support package, “if implemented, could provide some support to the Turkish economy. However, details remain scarce and we understand the financing will likely come over a number of years rather than be front-loaded”.