Turkish Lira Swings Violently As Erdogan's Economic Plan Spooks Traders

The Turkish lira swung violently, rising to session highs then slumping 1.5% after Turkey presented its medium term economic plan, which together with last week's massive 625bps rate hike was supposed to restore investor confidence in the country's struggling economy.

The Turkish Lira first rose 1.9% during the speech delivered by Turkey's finance minister Berat Albayrak in which he revealed targets for growth and inflation that signaled a somewhat realistic assessment of the economy and its outlook, including a current account deficit that was forecast at 3.3% for 2019, a number seen as realistic and a far-cry from some of the wild estimates recently suggested by analysts.

Among the details, growth was seen slowing to 3.8% in 2018 and 2.3% in 2019, and according to Bloomberg, the slowdown is fueling speculation that authorities are not planning to stimulate the economy with outsized government spending. Additionally, the government's inflation target is 15.9% for 2019, dropping to 6% for 2021.

But the TRY then tumbled when he spoke about the plan for helping banks focused on restructuring debt, and one particular headline sent the currency sliding:


As Bloomberg added, Turkey will assess the financial structure and asset quality of banks and carry out financial health assessments; after studies, a comprehensive set of policies will be introduced “in light of global examples and Turkish past experience, which will help banking sector to further strengthen, real economy to have access to credit at affordable rates, while creating room for credit restructuring if needed."

Albayrak also said that the Ultimate objective for the real economy is to "restructure current credit debt and ensure the continuation of value-add production" and added that the Development Bank of Turkey will be restructured with an expanded mandate.

The statement prompted fears of more government intervention, seen most recently in Erdogan's threats over the central bank's tightening actions, and in kneejerk reaction the TRY quickly dumped to session lows.

Yet as Bloomberg's Stephen Kirland noes, for all that fluctuation, the options market was sending a calmer signal, with 3-month implied vols hardly budging from a one-month low, where it has been since last week's rate decision.

Still, he adds that investors seek more detail on Turkey's plans to shore up lenders and address debt repayments and time will tell whether today's subdued volatility will prove transient.