The Turkish stock exchange halted trading of all listed stocks after the lira (the national currency) dropped below 17 Lira per US dollar on Friday December 17. “As of 16.24 (Istanbul time) transactions have been temporarily halted on the market of all shares on our stock exchange ,” the exchange mentioned in a public statement.
The Borsa Istanbul 100 index fell 7%> This was an incident that prompted halting trading in equity, equity derivatives and debt repo transactions twice within an hour. Trading of stocks resumed at 5:24 pm local time, and the index plunged as much as 9.1% within the first two minutes of its operations during that day.
Previously, the index had increased by as much as 5.6% before falling as the central bank's intervention in the money market failed to halt the lira’s decline. The nation’s currency has fallen amid pressure from President Recep Tayyip Erdogan on the central bank to lower borrowing costs, in order to boost Turkey's growth while its economy is still struggling. On Thursday, December 16, the Turkish central bank announced that it was cutting key interest rates from 15% to 14%, despite inflation is running at 21%.
Nick Stadtmiller, the Director of Emerging Markets at Medley Advisors, talked about the development: “The complete capitulation in Turkish equities today may represent a turning point in local sentiment. Turkish stocks have surged despite a worsening macro backdrop. But now, Turks pulling their money from the stock market may represent an acceleration in the trend of local capital outflows from the country.”
The unusual move comes at a time when Turkish citizens are rethinking about their hedge against inflation and how to deal with the local currency (lira) that has lost almost 40% of its value against the US dollar in the past month. For the first time on record, the main Borsa Istanbul stock index has crossed the 2,400 mark this week. However, so far this year, it has nosedived 37% in terms of US dollars, thus making it the worst-performing equity market in the world.
Since September, the key rate experienced a 5% fall in the central bank’s easing cycle, an incident that prompted corporate and retail investors to rush to purchase dollars. President Recep Tayyip Erdogan has been in favor of cutting borrowing costs to lower rates in order to free Turkey’s economy from depending on short-term foreign flows. But, industrialists have claimed that the current volatility is hurting firms and complained against Erdogan’s policy, which has led to the result in market turmoil.
Additionally, Richard Segal, a research analyst at London-based Ambrosia Capital, commented about the current incident facing the stock market and stated: “The typical reaction to depreciation in emerging stock markets is a rally as investors use equities as a hedge, and major stocks often have very hard currency revenues. However, today is different due to exchange rate volatility, and the lira is approaching rates, which suggests that the bank capital ratio is running low. In addition, some business groups have begun to speak more publicly.”
Why Is the Turkish Lira Crashing?
Turkey’s local currency (the lira) has been falling to all-time lows against the Euro and the US dollar in recent months as President Recep Tayyip Erdogan presses on with his widely criticized effort to cut interest rates, despite rising consumer prices. Therefore, citizens are struggling to purchase food and other goods, and the lira has lost about 40% of its value since the beginning of the year, becoming one of the world’s worst-performing currencies.
Following Erdogan’s directives, Turkey’s central bank has cut borrowing costs since September by 4 percentage points, despite inflation rising to about 20%.
Erdogan has long argued that high interest rates cause inflation, a contrary opinion by economists who say that increasing rates would drive prices down. Erdogan has been in power for some 19 years and has become increasingly authoritarian.
The rate cut has raised concerns over the independence of the Turkish central bank. Furthermore, the nation’s unconventional monetary policy has scared foreign investors who are dumping Turkish assets. Furthermore, Turkish citizens are rushing to convert their savings to gold and foreign currencies to protect them from surging inflation. As a result, the Turkish lira, which had not recovered from an earlier currency crisis in 2018, has been weakening to record lows against the euro and US dollar.
