Traders dump lira after Turkey's economic confidence hits a nine-year low

Key Points
  • Turkish economic confidence has slipped to a level not seen since March 2009.
  • The lira has endured further selling in the wake of the data.
  • At least one analyst predicts a "full-blown financial and currency crisis" if the current path is maintained.
Turkish rout won’t affect emerging markets, strategist says
Turkish rout won’t affect emerging markets, strategist says

Turkey's economic confidence has dropped to its lowest level in almost a decade, heaping more pressure on the country's trembling currency.

One measure of economic confidence for August hit 83.9, slumping from 92.2 in July. In response to that data, the lira shed value to reach 6.4 versus the U.S. dollar, a level not seen since August 15.

The confidence reading was the lowest recorded since March 2009 and comes amid a worsening rift with the United States. The diplomatic spat has resulted in the U.S. increasing tariffs on steel and aluminium originating from Turkey.

In response Turkey announced increased tariffs on U.S. products, raising duties on American alcohol to 140 percent, autos to 120 percent and tobacco to 60 percent. Tariffs were also doubled on cosmetics, rice and coal.

Turkey's economy was already considered particularly fragile due to its high level of debt that is priced in dollars. The more the lira weakens, the more expensive that debt becomes.

A man waves a flag displaying Turkish President Recep Tayyip Erdogan, as people take part in a rally near the '15 July Martyrs Bridge', formerly called Bosphorus Bridge, in Istanbul, on July 15, 2018.
Ozan Kose | AFP | Getty Images

Francois Savary, chief investment officer at Prime Partners, told CNBC's "Squawk Box Europe" on Wednesday that Turkey is economically hamstrung by its continued need to finance what it owes to other countries. Savary added that the recent Turkish asset rout should not "infect" other emerging markets.

"People have realized that the Turkish situation is very specific. The mismanagement of the economy for the last few years is quite obvious," he said.

The latest estimates from the International Monetary Fund (IMF) show that the total amount of Turkish debt payable in other currencies is more than 50 percent of the country's gross domestic product (GDP).

Investors have also been spooked by evidence that Ankara is influencing the central bank by persuading it not to raise interest rates to a level that would slow rampant inflation.

The appointment of Berat Albayrak as Turkey's minister of finance and treasury raised more questions, as he is the son-in-law of the President Recep Erdogan.

Turkish Treasury and Finance Minister Berat Albayrak speaks during a presentation to announce his economic policy in Istanbul, on August 10, 2018. 
Yasin Akgul | AFP | Getty Images

The lira had already been placed under pressure this week after the ratings agency Moody's issued a downgrade to 20 Turkish firms operating in the banking sector.

"The downgrades primarily reflect a substantial increase in the risk of a downside scenario, where a further negative shift in investor sentiment could lead to a curtailing of wholesale funding," Moody's said in a statement.

A report by ABP Invest in July claimed that Turkey could either pursue a more orthodox economic policy to correct the imbalances, or continue along its current path, "most likely triggering a full-blown financial and currency crisis later this year, requiring the IMF to intervene over the next 12 months."