On Monday morning, Financial Times journalist Joseph Cotterill tweeted: “South Africans, if you’re just tuning into the Turkish crisis because of the rand’s overnight drop - imagine if a country had also done Nenegate... but had then just kept going.”
But a reminder of what had been averted in South Africa may provide little comfort as the rand slumps over a crisis more than 8,000km away.
This is why the Turkish currency has plummeted.
After his re-election earlier this year, President Recep Tayyip Erdogan appointed his son-in-law as the country’s finance minister – and then proceeded to extend his iron grip to control interest rates. This is a no-no for international investors, who want to see a strict divide between the central bank and politicians.
Even worse, Erdogan has refused to hike rates, which could help save the lira. Currencies that earn a higher interest rates are more attractive.
The Turkish economy grew by a massive 7% last year, fuelled by credit. The government and local companies, especially construction firms, borrowed large amounts from outside the country. The country’s foreign loans now represent more than half of the country’s GDP.
This is extremely dangerous; the sharp slump in the lira made dollar and euro loans much more expensive. The fear is that some of the Turkish banks and companies may now go bust. (This is also why Erdogan wants to keep local interest rates low.)
The fallout may not be contained to Turkey. Turkish companies borrowed large amounts from European banks like BBVA, UniCredit, and BNP Paribas, and European authorities are getting nervous.
Usually when a country’s currency is under attack, authorities consider using some of its foreign exchange reserves to prop up its currency.
This is not an option for Turkey: In the first quarter of 2018, Turkey's foreign exchange reserves were $134 billion – while, by comparison, it borrowed $467 billion from foreign sources.
Because the central bank can’t hike interest rates to tame prices and consumer demand, inflation has hit 16% – compared to the central bank's target of 5 percent, which is roughly South Africa's rate.
A fight between Turkey and the US
The US government has demanded that Turkey releases a Christian pastor, who currently face espionage allegations after his alleged involvement in a failed 2016 coup in Turkey. Turkey has refused, and the US has reacted with sanctions.
US President Donald Trump last week also threatened to double import tariffs on Turkish steel and aluminium products.
When global investors get nervous, they dump anything deemed even faintly risky, particularly emerging market shares, bonds, and currencies.
South Africa is one of the first penalised because the local economy is not looking good: economic growth has stalled, unemployment is out of control, and the threat of a credit rating downgrade is looming large.
Also, importantly, the rand gets hit first because it is a very liquid currency. This means that traders know they can get in and out of the rand very quickly as there are massive amounts being traded in the rand every day. In fact, the rand is the 20th most traded currency in the world – it attracts much more action than the currency of Poland, with an economy 60% bigger than the South African GDP.
South Africa’s rand is the most overtraded currency in the world - the equivalent of about 17% of its GDP is traded a day - so it’s the best proxy for EM risk during London trading hours - and is whacked today because of #Turkey #ZAR https://t.co/NJ7VQa7tYe— Charlie Robertson (@RencapMan) August 13, 2018
Rand went above 15.30 at one stage. Now 14.77. Turkey and USA and trump and tarrifs again. We should be used to this. Again we must remember lessons from the past. When rand tanks do not panic. Fair value is below 14 and the rand will return there again. May hit 15 first again!!@— Wayne McCurrie (@WayneMcCurrie) August 13, 2018
As other currencies, like the Indian rupee, hit their weakest levels ever, there is some small consolation in the fact that the rand, currently trading at R14.47/$, still has some way to go before it reaches its record low: R16.90, last seen in 2016.
More on the Turkish meltdown and its impact:
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