The Currency Turmoil in Turkey

• 16 Aug 2018

Recently the Turkish Lira lost a fifth of its value against the U.S. dollar. The currency has lost over 40% of its value against the dollar this year.

• This plunge has caused food, fuel and rental prices to surge across the country.
• The backdrop to all this is the escalation in global trade tensions, with Beijing now lodging a complaint to the World Trade Organisation to determine the legality of U.S. tariff and subsidy policies.

Reasons for Depreciation

• The immediate cause of Lira's fall is the rising tension between Turkey and the U.S. over the continuing detention of American pastor Andrew Brunson on spying and terror charges.
  • The USA imposed 20 percent duty on aluminium and 50 percent on steel imports from Turkey.
  • Moreover, the NATO allies have been at loggerheads over a wide range of topics, including diverging interests in Syria, Ankara’s ambition to buy Russian defence systems, etc.
• Other underlying causes are:
  • The Turkish economy has been centred on a construction and consumption boom;
  • High inflation at more than 15%. This primarily leads to erosion of the purchasing power;
  • A high current account deficit and soaring foreign debt;
  • A strengthening dollar and higher interest rates in the U.S. have compounded the economic crisis in emerging markets and particularly in Turkey. Higher interest rates could draw more investors back to the U.S. and spark an outflow of capital from emerging markets.
  • President Erdogan’s tightening grip on institutions is being seen as an attack on democracy leading to capital outflows.

Steps Taken by Turkey

• Turkey doubled tariffs on some U.S. imports, including alcohol, cars, tobacco, cosmetics, rice and coal.
• Turkey is assured of $15 billion of investment package by Qatar which would be channelled into the banks and financial markets.

Impact

• The lira collapse and stregthening of dollar are driving a capital exodus from across emerging markets, sending currencies such as the Argentine peso and Indian rupee to record lows.
• European banks that own significant stakes in Turkish lenders are also at risk.
• Emerging equities fell 2 %, and are down almost 20 % from January highs.

• There are concerns also about China’s slowing economy which is pressuring other Asian markets. E.g.: Indonesia, raised interest rates for the fourth time since May.

• The dollar rise has hit commodities, with prices of Copper, gold and Brent crude slipping to new lows.