Turkish Lira Slumps 1.7% as Reserves, Financing Remain Weak

Turkey has not tightened policy enough to support the lira, which plunged to another record low on Friday, as the country's foreign exchange reserves and external financing remain potential vulnerabilities, according to rating agency Fitch.

Douglas Winslow, Turkey's chief analyst, told Reuters that more pressure from the currency, double-digit inflation and depleted foreign currency reserves would push for higher interest rates by the end of 2020.

The lira slumped 1.7% to a record low of 8.56 against the greenback, despite the dollar's weakness as votes of the US election are still on the count.

Turkey’s bilateral ties could suffer if Democrat Joe Biden continues to gain ground and becomes U.S. president, adding more pressure on the lira that has dropped some 30% this year and nearly 10% in the last two weeks alone.

Meantime, Turkey’s bilateral ties with the U.S. could worsen if Joe Biden becomes president, adding more pressure on the lira that has dropped some 30% this year and nearly 10% in the last two weeks.

Analysts say that Turkey and the U.S. Relations may be further strained if Biden is elected, putting pressure against Ankara's military interventions abroad and its campaign against opposition at home.

The Turkish central bank raised interest rates to 10.25% in September and could tighten again to avoid devaluation and tackle inflation, which records 12%.

However, Fitch said that the credit tightening in recent months has not been sufficient to reverse the downward trend in the lira and to a lesser extent in foreign exchange reserves.

Turkey has been rated as "Junk" by the three major agencies. Fitch Ratings was the highest at BB-, after revising the outlook to “negative” from “stable” in August, citing depleted foreign currency reserves and weak monetary credibility.

The net foreign exchange reserves at the Central Bank fell to $16.8 billion last month, the lowest level since 2004, from $41.1 billion at the end of 2019. Also, the Turkish foreign currencies and gold holdings recorded $221 billion dollars last month.