The Turkish lira fluctuated on Monday after President Recep Tayyip Erdogan’s threat to expel 10 Western ambassadors put severe pressure on the currency over concerns about the country’s economy.
The currency fell as much as 2.8 percent from Friday’s level to 9.85 Turkish lira early Monday morning in Asia, a time when light trading volumes could exacerbate the currency market’s range of volatility. The lira regained nearly all of its losses in the late afternoon session in London, but it has remained down around 7 per cent for the month so far.
The latest unrest came after the Turkish leader indicated last week that envoys from the United States, Germany, France and seven other countries would be forced to leave, raising the risk of a new crisis in Turkey’s already strained relations with the West. On Saturday, Erdogan appeared to double down on that warning, saying he had ordered them to be declared persona non grata.
However, by Sunday night, the ambassadors had not received official notification from the Turkish authorities. Diplomats expect to discuss the issue at a meeting of Turkey’s cabinet on Monday afternoon.
Turkey’s official Anadolu news agency said Erdogan “welcomed” the statements posted on Twitter by several Western embassies, citing presidential sources.
A short while ago, the US Embassy posted a tweet affirming its commitment to Article 41 of the Vienna Convention, which sets out the duty of diplomats to “non-interference in the internal affairs” of the country in which they work. Canada, the Netherlands and New Zealand all shared a similar message, while Norway, Sweden, Denmark and Finland retweeted the US post.
The Turkish president’s threat to expel the diplomats came after 10 countries published a joint declaration last week calling for the release of imprisoned businessman and philanthropist Osman Kavala.
Wolfango Piccoli, co-chair of the consulting firm Teneo, said that while it might be difficult for Erdogan to back off such strong public statements, it was “not a given” that the president would follow through on those statements.
He added that the countries involved accounted for half of Turkey’s 10 largest trading partners and that the expulsion of diplomats would not only lead to severe pressure on the lira, but also lead to “the worst crisis between Turkey and the Western world since World War II.” [ruling AKP party] He came to power in 2002.”
Emre Peker, an analyst at Eurasia Group, expected Erdogan to proceed with the expulsions and warned of the implications for the country’s $765 billion economy, which is already suffering from 20 percent annual inflation and currency volatility.
These developments will exacerbate Turkey’s economic problems, and are likely to fuel the trend of dollarization [of Turkish residents saving in foreign currency], potentially fueling a disorderly depreciation of the currency,” Becker wrote in a note to clients. “Given Erdogan’s insistence on unconventional monetary policies, Ankara will struggle to respond appropriately to mounting economic pressures, for example by raising prices, which increases the risk of a more severe market turmoil.”
The lira has already lost nearly a quarter of its value since the start of 2021, as Erdogan pressured the central bank to press ahead with interest rate cuts despite rising inflation.
The sharp devaluation of the currency has raised concerns among investors about the risks of the balance of payments crisis, given the country’s large external debt and low foreign exchange reserves.
In an update published on Friday, ratings agency S&P said that while it has improved somewhat over the past year, Turkey’s balance of payments position remains “weak”.
The central bank’s “usable” reserves – once borrowed money are taken out – stand at just $34 billion. That compares to the $170 billion in foreign debt that must be replenished in the next 12 months.
She said that these risks were partially offset by Turkey’s strong financial position compared to many other emerging markets.
Additional reporting by Adam Samson in London