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Is Turkey Headed Towards a Crisis After Erdogan's Latest Move?

Is Turkey Headed Towards a Crisis After Erdogan’s Latest Move?

Posted Thursday, March 25, 2021 by
Arslan Butt • 1 min read

Ratings agency Moody’s has cautioned that the Turkish president’s latest move to replace the central bank governor with someone who has a more dovish outlook is expected to have negative repercussions on banks’ fundings and hit investor confidence in the economy, which could drive credit rating negative for banks in the country and limit their access to market funding.

However, as Turkish banks appear to have adequate liquidity in foreign currencies and have managed to reduce their dependence on market funding since the Turkish Lira’s crisis back in 2018, the risks of this move have been somewhat limited. In a recent note put out by Moody’s, the agency observes, “Without central bank credibility, (banks’) market access is likely to again be costlier and limited to short-term syndications.”

Over the last weekend, President Erdogan suddenly decided to remove the previous central bank governor a few days after the latest rate hike decision and replace him with Sahap Kavcioglu – a known critic of high interest rates. The move caused the Turkish lira to plunge in value on market open on Monday, and it continues to trade around 10% lower than last week’s close.

To make up for this volatility in the currency, Erdogan has called on Turkey’s citizens to sell their assets in the form of foreign exchange and gold and replace their investments with the purchase of financial instruments backed by the TRY. This could potentially help stabilize the value of the Turkish lira, even as investors increasingly fear an upcoming inflation crisis in the country.

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