The Turkish Lira has plunged in recent weeks despite a significant interest rate rise to buoy the failing currency. While on figures alone the economy may appear prosperous, there appear to be some huge cracks which and deep routed issues.
Despite the failing Lira the Turkish economy has performed well against many of its peers currently enjoying the growth of 7.4%. Whilst the figures will necessarily promote investment in the near term some mavericks may spot an opportunity. Despite the encouraging growth rate markets are currently spooked by the rapid decline of the Turkish Lira.
Turkish inflation is very high at 10% double the central banks ideal. Whilst some predict that growth under the Erdogan economy will shortly slump to around the 3.7% next year.
The Turkish trade deficit remains a huge issue with Turkish companies having amassed significant debts in alternative currencies, such as the USD and Euro. Due to the devaluing of the Turkish Lira, these debts have become much harder to service.
Last week the Turkish central bank raised interest rates by 3% to 16.5%. This move was followed up by a program to assist corporates to repay foreign currency debt. The program essentially allowing debts to be paid at a fixed Turkish Lira rate. It is understood that roughly $3.5 Billion dollars’ worth of debt could be eligible for the fixed rate repayment.
Erdogan who is believed to have a huge influence over Turkey’s central bank has never hidden his disdain for high interest rates, faces elections in the coming weeks instead believing lower interest rates would fuel growth and expansion. However, now the economy finds itself unable to curb inflation, saddling a huge deficit and facing political uncertainty.
The political scenario and the Lira free fall has seen people tapping into cash reserves in order to exchange into far more stable currencies, further exacerbating the devaluation.
The Turkish lira has pretty much found itself in decline since the beginning of Erdogan era, with many investors finding his influence over the Turkish central bank troubling. The Lira has lost value successively over the last six years and hit an all-time low against the US Dollar earlier this week when exchange rates hit 4.9290 just before the 3% interest on Wednesday. In total, this year has seen the USD/TRY currency pair appreciate 20% despite and the arguably weak dollar.
During the final days of the trading week the TRY did gain some traction, potentially assisted by North Korean and US political fallout and cancellation of the proposed meeting in Singapore. This saw the USD/TRY weaken from 4.6639 to todays (Monday 28th) price of 4.5753.
In a word yes. The president is at the point on pleading with his citizens to convert their Foreign exchange reserves back to the Turkish Lira to avoid the crisis. The president if he was to retain also wishes to have further control over the Turkish central meaning the economy would be continually mismanaged. Investors believe the 3% increase in interest rate is too little too late and many anticipate the Us Dollar Lira rate to break the 5.000 in the medium term, especially with elections fast approaching and Erdogan’s authoritarian demeanour.