Regional domino… Crippling lira and Riyal while the U.S. dollar is fixed

Category: Report

Date: 2020-06-29T11:19:41+0000

Shafaq News / A conspicuous economic phenomenon is witnessed by some regional countries at this current stage. Iran, Syria, Lebanon, and Turkey are facing a collapse of their domestic currencies for reasons that are almost similar against the U.S. dollar; which portends major political-social repercussions unless they are dealt with wisely and quickly.

Experts agree that the value of a country's currency is determined by the demand on this currency, as if it was a commodity in the market, while the strength of the currency is determined by the country's trade balance, the greater its exports over imports, the stronger and more stable the currency is, and vice versa.

The value of any currency is determined by natural resources and wealth such as gas, oil, minerals such as gold and others, and the size of its monetary reserves and the country's production and export capabilities. But it is important to note that political and economic elements in general also control the strength of the currency and its position at home and abroad.

Inflation can turn into a destructive weapon for the strength of the currency. It is known that as inflation increases, people buy more stable foreign currencies; to prevent their domestic currency savings’ value from fading, which leads to a collapse in the strength of the currency, and clearly, that is happening in Iran, Syria, Lebanon, and Turkey.

However, the four countries also meet at another serious phenomenon; they do not constitute an encouraging attraction for investment because of its political turmoil that may affect the free movement of capital, so investors become more cautious in investing and adding strength to the domestic currencies of these countries.

These countries face intense interventions that affect their economic immunity and the stability of their currencies. Turkish President Recep Tayyip Erdogan, Iran's Supreme Leader Ali Khamenei, and Syrian President Bashar Al-Assad have repeatedly announced that their countries are under economic and direct sanctions, as in the case of Iran and Syria and Lebanon, as well as turkey's impact in the regional sanctions; which have severe repercussions that can be described as a “regional domino” on their domestic currencies.

 

Iran

The Iranian rial recorded a free fall and touched the threshold of 200,000 IRR against the dollar, after it was equivalent to 32,000 riyals when the nuclear deal with the West was concluded five years ago.

The Iranian government has few options to deal with the collapse, which was reinforced by U.S. President Donald Trump's unilateral exit from the nuclear deal nearly two years ago.

After a series of U.S. sanctions, Iran's oil exports –the main supplier of foreign currency - have been almost totally crippled; the lifeblood of Iranians and their economic ties to the outside world. More recently, Senior Vice President, Eshaq Jahangiri, said Iran's oil revenues fell to 8 billion dollars from 100 billion dollars in 2011.

Then COVİD-19 pandemic emerged; a blow no less severe as the limited foreign trade movement - which was still bringing some foreign currencies into the Iranian economy - was faltering. Therefore, with the lack of the number of dollars needed by the state and traders to import the necessary goods, the price of vital goods has increased insanely, with harmful inflation and low demand for the Iranian rial.

According to the International Monetary Fund (IMF) estimates, Iran's economy is at a 6% contraction this year, up from 7.6% in 2019, and inflation stands at 34% from 41% last year.

The rial slumped to a degree that prompted Iranians to rush to the dollar and to seek safe harbor for their fading national currency through the purchase of precious metals or real estate, the Iranian Ministry of Housing and Roads revealed a few days ago when it talked about a 23% rise in estate prices in the capital Tehran in May alone, and by 42% from May 21 to June 20 this year, compared to the same period last year.

As was noted earlier, the collapse of the national currency - as the current case in Iran- is causing a parallel collapse in the purchasing power of citizens; as the Iranian Statistical Center recently reported that it has declined by 34% in the past decade, due to the decline in the exchange rate of the domestic currency by losing its value by more than 60%.

In an attempt to confront the collapse; it was announced a few weeks ago that the Iranian parliament had approved legislation allowing the government to remove four zeros off the rial, and the government to begin within two years measures to abandon the rial to the toman currency, which is worth 10,000 IRR, an attempt to boost the local currency’s value against the U.S. dollar.

Syria

The Syrian pound has been in a state of decline since the outbreak of the civil-regional war in 2011, but the decline has taken a significant curve in the last few weeks after the dollar’s price reached 3,000 SYP from only 47 SYP 10 years ago.

Many factors combine in the conspiracy - if it can be called like this - on the Syrian pound, the most important of which is the "Law of Caesar", which the U.S. administration began to apply as a new sanction on Syria; strengthening its grip on the Syrian resources and preventing commercial and financial association from the regional countries with the Syrian economy, which mantles the doors of potential investments for the reconstruction phase.

Foreign investment projects were one of the encouraging options to revive the economic wheel after 10 years of war and to escape a series of U.S. and European sanctions that severely hindered the exchange of foreign currencies inside Syria.

In the meantime, the economic stumble of Iran- which was one of the pillars of Syria's economic support, along with Russia - is a clear indication of the idea of "regional dominoes", also reinforced by Lebanon’s economic crises and the decline in the stock of dollars in Lebanese banks, which were an important outlet for Syria’s trade movement; bypassing the sanctions and blockades.

This causes panic among Syrian capitalists, who have been heavily accepted to acquire the dollar as a substitute for the Syrian pound, to ensure the value of what they own, and for their fear of being affected by the sanctions of the new "Caesar's Law". U.S. and European sanctions affect hundreds of Syrian companies and financiers, including Rami Makhlouf, Samer Al-Fawz, Wasim Qattan, Yasser Aziz Abbas, Maher Burhan Al-Din Al-Imam, Amer Fawz, Saqar Rustum, Abd Al-Qadir Sabra, Khidir Ali Taha, and Adel Anwar Al-Alabi.

After 10 years of armed conflict, Western sanctions, and the Arab withdrawal; experts believe that the Central Bank of Syria is suffering from a severe shortage of foreign currency reserves for several reasons, including the disruption of revenues, sea and air transport activity crippled due to the outbreak of COVİD-19 pandemic, the collapse of oil prices globally, and the exit of many Syrian oil areas from the control of the state.

The absence of dollar increased the demand for it even by the government, which is forced to secure the necessary supplies for the lives of citizens from abroad in foreign currency, raising the value of the dollar against the lira, which was gradually falling.

The additional pressure on the Syrian pound came after the cost of rebuilding Syria was estimated by the United Nations - around 400 billion dollars - and the war itself cost more than 500 billion dollars. As the stranglehold on Damascus tightened, the Syrian pound was the victim.

Lebanon

To understand the factors that led to this vehement collapse in the Lebanese pound; after it held steady at 1,500 LBP against the dollar since the end of the civil war 30 years ago - and now reaches more than 6,000 LBP against the dollar, the foundations of the Lebanese political-economic system cannot be ignored.

After building Lebanon’s economic foundations as a center for trade and services - besides relying on some industrial and agricultural sectors, former Prime Minister Saad Hariri focused on turning Lebanon into a financial center, while industry and agriculture fields were marginalized, and he decided to stabilize the Lebanese pound’s exchange rate against the dollar; and offered banks high-interest rates to attract money and deposits from abroad.

This brought about a remarkable economic recovery in the early post-war years, while other sectors were collapsing in turn. Lebanon was in a financial crisis, for which economic rescue conferences and summits sponsored by the U.S., K.S.A., and France were held based on helping to fill the country's budget deficit.

In November 2018, the Lebanese were shocked by Finance Minister Ali Hassan Khalil, who declared that the state’s treasury was empty of Lebanese pounds!

Over the years, the policy of borrowing has made Lebanon into one of the world's most debt-to-GDP countries (the metric comparing a country’s public debt to its Gross Domestic Product). According to the Lebanese Banking Association, the external public debt was 91 billion dollars at the end of 2019.

As the dollar is approaching the threshold of 7,000 LBP - amid fears that it will reach 10,000 LBP - a “legalization” process has been carried out to seize the citizens’ money by preventing them from withdrawing their dollar deposits once and for all, and then later allowing the individual to withdraw only 100 dollars from his account weekly, and now, borders were set for withdrawals that vary from bank to bank, under the slogan of promoting the Lebanese pound as a national currency that needs to be supported.

However, some banks allowed the wealthy to transfer millions of dollars from their accounts in Lebanon abroad, people have completely lost confidence in the domestic currency, which was registering a daily repercussion; at a time when the central bank and the government were adopting different dollar prices between banks, exchange companies and banking companies. That spread confusion and mistrusts in the Lebanese currency; with the attempts to control remittances from Lebanese expatriates from abroad to their families in the dollar, euro, or other currencies.

The old exchange rate at 1,500 LBP became only available for imports of wheat, medicine, and fuel.

The state’s treasury revealed a bankruptcy that affects the majority of ordinary citizens, and it turns out that banks have used billions of dollars of money of Lebanese depositors; to support the deficit in the budgets of successive governments. Foreign currency deposits are eroded, while remittances from expatriates have declined; for economic reasons or the disruption of the economy in the countries where they work due to COVİD-19 pandemic.

Political forces exchanged accusations regarding the collapse of the Lebanese pound; some accused pro-Damascus and Tehran loyal forces of smuggling dollars into Syria, other forces accuse the so-called "Group of America" of being responsible for taking the dollar out of the Lebanese economy as part of the U.S. restriction on the Lebanese livelihoods to force them to hold the resistance movement accountable and prevent Damascus from benefiting from the Lebanese economy.

However, the "Law of Caesar" has in recent days increased the concerns among The Lebanese over their domestic currency, as the law threatens to cut off the last strands of Lebanon’s economic ties with its surroundings.

The collapse of the Lebanese pound led to the unemployment of hundreds of thousands of citizens, as well as the closure of thousands of institutions and shops, while the prices of basic goods; like food and medicine - under the pretext of the lack of dollar for traders to buy from abroad – increased insanely, alongside the lack of agricultural and industrial domestic production since the days of Rafic Hariri. Financial corruption spread with the policy of quota that allowed the accumulation of violations and failures for 30 years, without any real reform or saving plans that would prevent the country from borrowing at every crisis.

Turkey

The state of the lira is disturbing the Turks. Its price has been declining in recent years, especially in recent months; after the outbreak of COVİD-19 pandemic, which crippled tourism and air traffic to Turkish resorts, which were attracting more than 50 million tourists and generating revenues of more than 60 billion dollars.

Turkey's involvement in several off-border military interventions in Syria, Iraq, and Libya raises further concerns over the Turkish lira and the stability of Ankara’s political and economic environment, while the central bank is cutting interest rates on deposits to 9.75% from 24% in 2019, to encourage economic activity.

The dollar’s price reached more than 6 TL, which means that the lira has lost more than 50% of its value in the past three years - more than 13% in 2020 alone. Turkish experts believe that high inflation and low-interest rates are urging investors towards safer hideaways; including the dollar, which reduces the demand on the lira.

According to Goldman Sachs Group Inc., the Turkish lira could lose more than 14% of its value by the end of 2020, surpassing the 8 TL barrier against the dollar; a threshold it had touched in April as it reached 7.28 TL for 1 dollar.

As Turkish export resources and tourism declined, the U.S. dollar's demand increased and pressure on the lira worsened in recent months.

Since the coup d’état attempt in the summer of 2016, the Turkish lira has entered a phase of sharp oscillation and became vulnerable to domestic and regional political developments. This has been evident after tensions between Erdogan and Trump, who publicly threatened to bring down the Turkish lira; before relations between the two sides were later normalized.

But the tension between Ankara and Washington harmed turkey's investment. Also, Ankara's ability to attract European or wealthy K.S.A and U.A.E investors has declined in recent years, alongside strained relations with Egypt, Syria, and others; not to mention the effects of U.S. sanctions on Iran.

Amid the lira's decline, Turks tend to exchange their savings into stable foreign currencies, pushing the domestic currency to further decline.

The Turkish lira crisis does not seem to be temporary, as the lira fell from 2 TL against the dollar until 2014, to 3 TL with the upheaval attempt in 2016, then to 4 TL down to 6 TL and more, a trend worsened with Erdogan taking office in 2018.

One of the repercussions of the collapse of the Turkish lira is a huge investment in the estate sector in Turkey. Whoever visited Istanbul in the past few years surely noticed the skyscrapers that have made the city look like Dubai in a relatively short period. The cost of this massive rebuilding process is billions of dollars, without achieving the quick and desired returns. These construction funds relied on huge loans from Turkish banks peaked in 2013 and 2014, and when the sales faltered, interest accumulated on loans granted to investors; at the same time the lira was recording severe declines in its value. For example, the new airport loans were 5.7 billion Euros in 2015 and were equivalent to 18 billion TL at the time, but now it is equivalent to 40 billion TL!

This is a disastrous failure in one project. The repercussions of risky investment in the estate sector at the time, COVİD-19 pandemic’s crisis, and sometimes the turmoil with the regional and international environment; spread a pessimistic veil on the Turkish economy and prevent its rise again, up until now.