EM Thematic May 13, 2022 / 07:50 am UTC

The Puzzle Of TRY/ZAR

By Francesca Beausang

TRY/ZAR rose in April and while it has fallen since 9 May, it remains higher than 15 April's parity. How can the currency of a commodity importer with 70% inflation register gains against the commodity exporter's currency? The scale of Turkish intervention and its absence in South Africa explain it.

While Turkish 5-yr CDS has just broken a record of 700bps and the yield on the 10-yr Eurobond is above 9%, given how the lira now bears no direct relation to market valuation, but is a reflection of the extent of Turkish state-owned banks’ forced intervention, its strength relative to ZAR comes as less of a surprise. The Turkish central bank upping the share of FX revenues that exporters are required to sell to the national lender to 40% from 25% also helps, as does the increasing pressure on state banks to limit corporate client’s purchases of foreign currency. Hence the underperformance of the rand vis-à-vis the lira is praise-worthy, as it is a reflection of the perennial independence of the South African central bank, despite the non-reformist wing of the ANC’s frequent attempts at compromising it. Meanwhile, the Turkish Treasury’s proposal of interest-free lira funding for investors to buy local bonds with a 4% return in dollar terms is unlikely to lure investors, given a two-year lock-up period which traps investors in hyperinflation. Further lira losses from the current USD/TRY 15.3 are likely, despite FX intervention, as political uncertainty adds to economic underperformance. Indeed, the Turkish Supreme Election Board has announced that all of the country’s election boards will be renewed by July 6 in line with the anti-democratic amendments made recently to the election law, which increases the risk of a snap poll after July 6, once Erdogan has chosen the heads of the provincial electoral boards.

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I, Francesca Beausang, the lead analyst certify that the views expressed herein are mine and are clear, fair and not misleading at the time of publication. They have not been influenced by any relationship, either a personal relationship of mine or a relationship of the firm, to any entity described or referred to herein nor to any client of Continuum Economics nor has any inducement been received in relation to those views. I further certify that in the preparation and publication of this report I have at all times followed all relevant Continuum Economics compliance protocols including those reasonably seeking to prevent the receipt or misuse of material non-public information.