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Home / Features / Can the Turkish lira start showing any signs of improvement after the country’s interest rate hike?

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Can the Turkish lira start showing any signs of improvement after the country’s interest rate hike?

When it comes to top five worst performing currencies from around the world, the Turkish lira conveniently makes it in the list. There are several reasons behind this fall in the currency’s value. Let’s take a look at some of them.

Since January 2018, the lira has lost 40 percent of its value against the US dollar. No other emerging market currency has lost so much of value this year. Its only competition is the Argentine peso which lost 36 percent of its value against the dollar during 2018. Turkey’s money is facing such trouble for the first time since 2001. You can buy seven units of lira with one dollar. But, five years ago, you could use one dollar only to buy two units.

After the Brexit referendum, the pound was expected to lose its value. However, it fell 7.1 percent. This loss was far lesser compared to how lira has been losing its value this year.

Local businesses are facing the heat

The extreme drop in the local currency’s value means Turks need to pay more for their imports. Banks end up paying more for their loans.

Turkey’s problem may also create trouble for countries that do a lot of business with it. Eurozone banks like BNP Paribas, UniCredit, and BBVA are financially attached to Turkey. This is the reason; the European Central Bank has already sounded the alarm bell as experts think the trouble might spread towards Europe during the coming days. Due to the fear about Turkey’s crisis spreading in Europe, investors from around the world are selling lira as well as Euro. They are buying Swiss franc, Japanese yen, and the US dollar as safer alternatives these days.

Economists have pointed out that Turkey economy is facing several issues since the last few years that have caused currency’s downfall.

Turkish central bank’s lack of ability to control interest rate

Experts suggest that the country’s central bank remains under pressure due to Turkish President Recep Tayyip Erdogan who does not believe in increasing interest rates to control the economic trouble. Usually, the central bank of any given country makes borrowing more expensive to control the rising inflation and growth rate. People automatically stop spending unnecessarily when borrowing becomes costly. However, in spite of high inflation percentage of around 15.9 percent along with a growth rate of 7 percent for several months, the central bank was not allowed to take any measure.

President Recep Tayyip Erdogan made several promises about public spending before the Presidential elections in June this year on the basis of external borrowing. The government is already facing a budget deficit as well as trade deficit due to more of imports and lesser exports.

Foreign investment during the last few months has proved to be a saving grace. However, such investment is expected to drastically reduce during the coming months due to the troubles boiling in the economy.

Investors were also spooked when the president asked his son-in-law Berat Albayrak to take over as the country’s finance minister in July. Political analysts believe the president wants direct control over the finance ministry and thus appointed his son in law and a front face.

Trade war and diplomatic trouble

In October 2016, Turks arrested American Pastor Andrew Craig Brunson for his links with the groups that were planning to overthrow President Erdogan's regime. The president made several allegations against the US, and the Pastor was released from jail only to be kept under house arrest. This has increased the strain on Turkey and the US’s relationship. Further, American President Donald Trump’s tariffs on aluminum and steel imported from Turkey have recently added fuel to this fire. The lira fell even faster after the news about duties.

Political analysts believe that Brunson’s release can help in softening Trump’s stand on tariffs and other issues. Easing other diplomatic matters can surely help Erdogan to get American support that he badly needs to change the economy’s direction.

Government’s new economic plan

The country’s president recently said its enemies are trying to attack Turkey and targeting its currency economically. Erdogan’s hunger to keep complete control over economic factors might prove to be a hurdle for Turkey when it approaches the IMF for financial help. The president would most probably not appreciate international interference in economic matters of the nation.

On September 13, the country’s central bank increased the interest rates and brought it to the 24 percent mark. This increase has been considered as the highest since 2003 when Erdogan took charge as the President. During his speech on the same day, he assured the countrymen that the regulator’s interest rate decision would start showing results. He also urged people to buy the local currency with all their savings to make it stable. The government has also put restrictions on using foreign money to purchase real estate. The government has also urged its citizens to exchange dollars and Euros that they hold within the next thirty days. Both these moves have helped the currency to move a bit up against the dollar. Good forex trading software can point out the same.

To attract investors who are looking for better returns, the country’s regulatory bank needs to demonstrate its control and ability on the economy by increasing the interest rates till everything comes back on track. Turkey’s rate of inflation during August was a whopping 18 percent. Taking such decisive action will not only shore up the currency but will undoubtedly improve its credibility.

Such move will impress local investors, and they might once again start buying the local money thereby increasing the demand for lira.

Expert’s opinion

Bluebay Asset Management’s senior emerging markets strategist, Timothy Ash interacted with journalists and said by increasing interest rates; the Turkish regulator has given another chance to the country to get back on track. Making changes in the interest rate will help in rebuilding the trust in the market. He believes Turks will emerge once again without seeking any help from the IMF. The rebalancing procedure might prove to be difficult, but the country will find its way out with the help of right policies. Even American economist Adam Posen shared a similar opinion and expressed relief regarding the Turkey Central Bank’s decision. He feels the bank has shown its guts by going against Erdogan’s perspective.

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