While Turkish authorities blame the weakness of the lira on sinister foreign influences, a large part of the damage comes from a more local source: the growing fondness among the country’s companies and savers for foreign-currency deposits.
The share of Turkish bank deposits held in currencies such as US dollars and euros hit the equivalent of TL1tn at the end of March, according to data from Turkey’s Banking Regulation and Supervision Agency.
That tally edged past the TL993bn held in the country’s own currency and reached the most elevated level since the wake of a banking crisis that struck at the turn of the millennium, according to an analysis of the data by Renaissance Capital.
The Turkish currency has dropped almost 14 per cent this year against the dollar, and is the heaviest faller among major emerging market currencies apart from Argentina’s peso.
“The middle class has lost faith in [Recep Tayyip] Erdogan,” said Charles Robertson, Renaissance chief economist, referring to the Turkish president whose vision of a strong economy has frequently been at odds with economic orthodoxy.
Mr Robertson said foreign investment flows had propped up the lira early in 2019 even as locals pulled back from the currency. However, those inflows appeared to have eased in late March and April, he said, removing a key pillar of support for the lira.
This so-called “dollarisation” trend has taken hold while Turkey is lodged in a painful recession coupled with acute inflation. Rating agency Fitch on Friday predicted the Turkish economy would contract 1.1 per cent this year. It now expects growth to average at just 1.5 per cent from 2018 to 2020 — a dramatic slowdown from the average of 6.8 per cent recorded in 2010 to 2017.
Timothy Ash, analyst at BlueBay Asset Management, said secular Turks were “giving up” on a country that had increasingly drifted towards conservatism, fanning the shift away from liras. Policy mis-steps by the central bank had also driven the trend, he said. “I think both sources of dollarisation will accelerate,” he said.
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