ISTANBUL: What will it take to halt the Turkish lira’s slide? That’s the question investors are asking as they go into 2022 pondering the worst-performing currency in emerging markets this year.

       Even Thursday’s pledge by the central bank to pause rate cuts failed to stem the lira’s slide and an abrupt stock-market slump the day after.

       That meeting was the latest landmark in a brutal year for Turkish markets that started with the ouster in March of the market-friendly central bank governor Naci Agbal.

       Then the policy loosening began in earnest, as President Recep Tayyip Erdogan enshrined an unorthodox low-rate policy at the heart of his strategy to tame soaring inflation and create jobs.

       “For Turkey to return as a winner, it needs a change in both economic and political mentality,” said RAM Capital SA money manager Ogeday Topcular.

       “While a twist in the Turkish central bank’s monetary policy could act as a short-term game changer, it may fall short of convincing investors.”

       The lira is down 55% in the year, set to surpass declines in the 2001 financial crisis that brought Erdogan’s AK Party to power.

       On Friday, Turkey halted trades on all listed stocks after sharp declines triggered a market-wide circuit breaker, with the lira extending declines to a record low. While stocks are still up 41% this year in local terms, they are the worst performers globally in United States dollars with a 36% slump.

       Five hundred basis points of cuts since September has given Turkey one of the lowest real yields in emerging markets.

       Will the central bank be forced into a policy about-face as it has during lira crises of the past? Strategists, including those at Goldman Sachs Group Inc, think the chance of a sizable hike in the first half of the year is growing as market trauma from the rate cuts feeds through into the broader economy.

       But there are few signs Erdogan will back down from his stance on rates, which has its roots in notions of usury and the belief that high borrowing costs are passed on to consumers, fanning inflation.

       “The current administration appears to be motivated by creating jobs and economic growth and are less concerned with FX and inflation stability,” said Paul Greer, a London-based money manager at Fidelity International.

       “This mix of macro priorities is at odds with what offshore fixed-income investors are looking for at the moment.”

       There are no plans to hold Turkey’s next general elections sooner than June 2023, but that hasn’t dimmed speculation about the possibility of an early vote.

       Were that to happen, “the market has to fear that there will be some desperate action on spending or government in a bid to improve the ranking with the electorate,” said Lutz Roehmeyer, chief investment officer at the Berlin-based Capitulum Asset Management GmbH.

       That would “likely weigh on the currency further,” he said. — Bloomberg

       With most foreign investors long-departed, it’s the billions of dollars of hard currency savings held by Turkish households and local companies that will drive lira volatility in 2022. Residents held $226 billion of foreign currency as of Dec. 3 -- equivalent to more than 60% all deposits, according to the latest central bank data.

       “A loss of confidence in the lira by Turkish citizens has probably had a bigger impact on the currency’s decline than foreign investors’ perceptions,” said Nick Stadtmiller, director of emerging market strategy at Medley Global Advisors. Still, “companies and individuals need a certain amount of lira on hand in deposits to pay regular expenses, which will keep a certain amount of lira in the system,” he said.

       And there are risks that are far beyond Erdogan’s control. As central banks in the West, including the U.S. Federal Reserve, roll up their sleeves for the inflation fight ahead, bets on tighter monetary policy in the world’s developed economies are mounting. Higher rates for the world’s safest assets will sap the appeal of risky emerging market, including Turkey’s.

       “Coupled with a loss of confidence in the central bank’s management, foreign interest will be subdued,” said Carlos Hardenberg, portfolio manager at Mobius Capital Partners. - Bloomberg