What can devaluation of Turkish lira mean for Pakistani rupee?

LAHORE: With a steep fall in the value of Turkish lira in the last two weeks, experts contend that it’s after effects may impact the Pakistani economy in the shape of a possible currency devaluation.

“Pakistan’s current account deficit is among the highest in emerging markets (EM) countries, and the currency is sliding. The Turkish lira is now the cheapest currency in EMs, but the Pakistani Rupee is only fair value. It would need to fall another 30 to 40 per cent to be as cheap as the Turkish lira. Luckily, Pakistan’s central bank has been allowed to respond appropriately with interest rate hikes and allowing the currency to weaken. These measures and a potential IMF deal, might allow Pakistan to avoid a crisis, says Charlie Robertson Global Chief Economist, Renaissance Capital.

On August 13, the Turkish currency stood at 6.95 liras for one US dollar after falling 1.39 liras since August 9, igniting fears that the effects of its fall may be felt in other emerging markets as well.

Turkish companies that have borrowed dollars from European banks to fuel growth are finding it harder to repay the loans as lira loses value.

According to experts, the European banks may become overstretched under the threat of non-performing loans, and this has a potential to cause a full-blown financial crisis.

Since April 2018, the dollar index has strengthened by 7.6 per cent due to rising US interest rates that has seen a flight of capital from the emerging markets.

The dollar hit another 13-month high against a basket of major currencies on August 15.

Analysts contend that the safe-haven demand for US dollar rooted in fears over fallout from the

Turkish lira’s recent drop will boost the US dollar adversely affecting the Pakistani Rupee in return.

Maha Jaffer Butt, Research Director at Capital Stake contends that the Pakistani rupee may feel a similar impact compared to other emerging markets.

In the current year, Turkish lira is down by 38.6 per cent, Indian Rupee by 8.9 per cent, Argentine Peso by 37.7 per cent and South Africa Rand 15 per cent elevating fears of a global financial contagion.

However, Arif Habib Research Director Samiullah Tariq and AKD Securities CEO Farid Alam reject the possibility of the current crisis in Turkey impacting the value of rupee. “Turkish textiles compete with Pakistani textiles, and the devaluation in Turkey’s currency might make its textile exports cheaper and a lot more competitive. But it will not have a direct impact on the Pakistani rupee,” says Samiullah Tariq.

Farid Alam, on the other hand, feels that Turkey’s economic crisis will at most discourage foreign investment in Pakistan as investors become less tolerant to emerging markets.

Turkey and the United States remain at loggerheads in one of the worst spats between the two countries over the detention of American pastor Andrew Brunson from the last two years and number of other issues.

The two sides have slapped sanction on one another as talks recently held in Washington failed.

Meanwhile, markets are deeply concerned over President Recep Tayyip Erdogan’s economic policy measures that have seen inflation reach nearly 16 per cent. The Turkish central bank has been reluctant to raise rates in response.