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GRAPHIC-Pain points for Turkey's lira

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By Karin Strohecker

LONDON, Oct 26 (Reuters) - Turkey's lira enjoyed a relief rally on Tuesday, pulling away from its latest record low hit in the midst of a diplomatic crisis that had seen the currency careering towards the 10 to the dollar watershed.

But the latest rout has cast fresh focus on the country's vulnerabilities which has seen the currency sink more than 20% since the start of the year.

Below are five charts showing economic and fiscal pressure points:

1/INFLATION

With new forecasts from the central bank due out this week, a number of analysts predict inflation to hit 20% in the not too distant future.

The 300 basis points of monetary easing delivered by the central bank in the last two months will only accelerate price pressures. The central bank said it had limited room to ease this year. But since it cited transitory and external supply side factors such as food and energy for inflation, analysts predict more rate cuts ahead.

"Bringing down inflation in a rapid way is not a policy priority," said Yarkin Cebeci at JPMorgan.

2/THINNING RESERVES

Turkey's foreign currency reserves have been under pressure for some time and leave little room for manoeuvre to help stem the decline of the lira.

The country's net reserves have edged higher since April. But excluding swaps, reserves stood at nearly minus $38 billion on October 8, according to analyst calculations. This was after an allocation of Special Drawing Rights - the International Monetary Fund's own currency - over the summer that brought some relief.

"We all know that (central bank governor) Kavcioglu has no mandate to hike rates so the only defence will be spending FX reserves the CBRT does not have," said Tim Ash at BlueBay Asset Management.

3/DOLLARISATION COMEBACK

With many foreign investors having reduced their exposure to Turkey's financial markets, the lira is chiefly driven by domestic forces.

Local individuals and firms have a track record of swapping their currency exposure from lira into dollars in times of strife.

"Dollarization, which has now reached 57.0% of Turkish banking deposits from 50.4% in August, is likely to accelerate higher – in part as a reflection of the depreciating currency, and more crucially, as retail customers switch into FX deposits," said Phoenix Kalen at Societe Generale.

4/TILTING DEBT

Turkeys external debt-to-GDP ratio of around 60% remains in line with emerging markets as a whole https://www.reuters.com/article/global-debt-iif-idUSL1N2N00ZU, but while the private sector has deleveraged external debt in recent years, public sector debt has bulged.

Barclays calculates that $58 billion of public sector debt - including FX swaps with other central banks - are due in the next 12 months, $2 billion of which are due in November.

Dennis Shen at Scope Ratings said the change in currency composition added to the pressure with further lira weakness bound to exacerbate the strain.

"One of the main problems is that Turkish government debt used to be mainly lira - but that has changed now," he said. The latest statistics show nearly 60% of government debt is now denominated in hard-currency, a mix of U.S. dollars and euros mostly.

5/PRICEY ENERGY

One of the largest importers of gas in Europe https://www.reuters.com/world/middle-east/turkey-braced-costly-winter-record-gas-demand-expiring-contracts-bite-2021-10-12 and a major importer of crude oil, Turkey has felt recent energy price rises more than many of its emerging market peers.

The price gains are bound to add to upward price pressures in the broader economy, with crude oil prices in lira having gained more than 140% since the start of the year.

Gas use for heating and small scale manufacturing is subsidised in the country, though many long-term contracts for supplies have yet to be renewed. ($1 = 9.5998 liras)

(Reporting by Karin Strohecker; Editing by Christina Fincher)

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