Turkey’s currency Lira faces twin tests of interest rate cuts this week, along with the impact of the country’s hefty debt repayments in the last two months of the year.
As per Bloomberg news, the Government of Turkey and other companies have to repay $ 13 billion in external debts, according to official data. Out of $ 13 billion, $ 8 billion debt is set to mature in November. As per available data, it is the biggest debt amount due in the next ten months.
Debt Pile
The impact of such massive repayments tends to increase foreign currency demands, which leads to additional pressure on Lira. Also, the cutting of interest rates leads to additional risk to the economy, which has been relying heavily on external borrowings.
The Lira has already lost 25% in value against the dollar, recording new lows. This was a fallout of two unexpected and consecutive interest rate cuts since September by Central Banks reportedly under pressure from President of Turkey, Recep Tayyip Erdogan.
According to the chief economist of HSBC asset Management, Turkey, Ibrahim Aksoy, who is based out of Istanbul, the currency is expected to weaken further as new rate cuts will announce this week in addition to the debt repayments in November and December.
The Bloomberg surveys, which have for the past two years Aksoy as its top forecaster for rate decisions in Turkey, expect a 100-basis point reduction to 15% on coming Thursday when policymakers meet. This reduction is in line with Central Bank expectations after surveying 48 people from corporate and finance sectors as well as the Bloomberg poll median estimate.
The Turkish Lira traded at 10.0182 in New York on Friday early morning as it crossed the psychologically important level of 10. As per data compiled by Bloomberg, Options traders are expecting more than 50% probability of the Lira declining to 10.5 against the U.S. dollar by December end.
Demand for Natural Gas
Apart from debt repayment, Turkey’s demand for natural gas imports is weakening the Lira as the need for dollars in foreign exchange increases. This year, the Turkish Government expects a 25% hike in gas consumption to 60 billion cubic meters. Surging global prices for natural gas has forced the state-owned Botas to increase purchases from the spot market at a higher cost. To absorb the impact on the market, the central bank has allowed the direct sale of foreign currency to Botas. The bank supplied Botas with $258 million in October, resuming after three months of sales halt.
In an effort to meet its winter demand, Turkey has increased its imports of Liquified natural gas from the U.S. to six cargoes up from the five cargoes it imported in the preceding seven months.
