Turkish lira

Turkish lira’s depreciation further shakes the battered economy 


The Turkish lira nosedived more than 15% on Tuesday (Nov. 23) after President Recep Tayyip Erdogan defended recent sharp rate cuts, and declared Turkey is fighting an “economic war of independence”.

The currency tumbled as far as 13.45 to the U.S. dollar, a new historic low, before easing slightly to close 10.2% lower at 12.7015. The Turkish lira is by far the worst performing emerging market currency this year. It has lost 42% of its value this year, including shedding 22% just since the beginning of last week.

The Central Bank of Turkey slashed its one-week repo auction rate by 100bps to 15% early in the month following a 200bps cut in October and a 100bps cut in September. Erdogan, who backs an unconventional theory that high rates cause inflation, has repeatedly pressured the central bank to lower interest rates. Turkey grapples with inflation at near 20%, the highest since January of 2019 and well above the central bank’s mid-point target of 5%.

“This irrational experiment which has no chance of success must be abandoned immediately and we must return to quality policies which protect the Turkish lira’s value and the prosperity of the Turkish people”  Semih Tumen, the former central bank deputy governor, dismissed by Erdogan last month wrote on Twitter.

Tumen’s comments echoes the view of many analysts who point their finger at irresponsible monetary easing and low interest rates of the sort championed by Erdogan.

“Insane where the lira is, but it’s a reflection of the insane monetary policy settings Turkey is currently operating under,” Tim Ash, senior emerging markets strategist at Bluebay Asset Management, said in a note.

While the lira tanked, Turkey’s benchmark BIST100 index closed up 1.66%, likely as international investors sought to capitalize on cheaper exchange rates.

Turkish lira

Turkey, with a population of roughly 85 million, is not the only country facing a currency crisis. An analysis by Nomura found that the four emerging markets most at risk of an exchange rate crisis are Turkey, Egypt, Romania and Sri Lanka.

The analysis considered indicators such as external debt as a percentage of gross domestic product, the ratio of foreign exchange reserves to imports, and stock market index.

“Looking ahead, the prospect of the Fed normalizing monetary policy amid China’s deepening economic downturn is not a particularly good combination for [emerging markets],” the Japanese investment bank said in its report last week.

The U.S. Federal Reserve gears up to taper its huge asset purchases this month. Most Fed
policymakers have said they won’t consider raising rates at least until the taper winds down, but investors brace for rate hikes on horizon, with the initial hike now priced in for June 2022.

As the Fed taper and interest rate hikes are expected, emerging markets are confronted with other challenges such as growing fiscal and current account deficits, as well as rising food prices, Nomura said.

Rising U.S. interest rates are often thought to be bad news for emerging market economies as they increase debt burdens, trigger capital outflows, and generally cause a tightening of financial conditions that can lead to financial crises.

According to ratings agency Fitch, in August 57% of Turkey’s central government debt was foreign currency linked or denominated, meaning paying that debt becomes more painful as the lira continues to drop in value.

The lira’s depreciation is making it harder for businesses to pay off foreign-currency debt and increasing the cost of imported goods further hurting households.

The Turkish economy has also been hit by geopolitical tensions with the West, current account deficits, shrinking currency reserves, and mounting debt.