USD/TRY: Lira to see further losses as Moody’s warns a possible balance of payments crisis – MUFG

The Turkish lira continues to underperform with USD/TRY hitting a new record high last week at 7.5145 as it is second-worst performing emerging market currency this year having lost around a fifth of its value against the US dollar. Meanwhile, Moody’s warns of the increasing likelihood of balance of payments crisis, which adds further downside pressure to the lira, per MUFG Bank.

Key quotes

“Even after such a sharp adjustment lower, the lira remains at risk of further losses. In an unusual move, Moody’s has warned that Turkey could face a possible balance of payments crisis while downgrading their credit rating deeper into junk territory. Turkey’s credit rating now stands five levels below investment grade at B2.” 

“Moody’s analysts stated that ‘Turkey’s external vulnerabilities are increasingly likely to crystallize in balance of payments crisis’. Moody’s expressed concerns over the level of Turkey’s foreign currency reserves, growing dollarization, and the erosion of fiscal buffers. They noted that if lenders’ required reserves for lira and foreign exchange liabilities are netted out, net reserves ‘are now close to zero’.” 

“While Turkey’s recent gas discovery may provide some relief to the current account balance, it is not expected to come on stream quickly enough to ease threats to Turkey’s external accounts. The situation is being made worse in Moody’s opinion by ‘the country’s institutions which appear to be unwilling or unable to effectively address these challenges’.”