Crash Turkish lira symbol of policy failure

The currency world hates uncertainty. Yet the unpredictable quarrel between Turkish President Recep Tayyip ErdoÄŸan and his French counterpart Emmanuel Macron is not the reason for the lira crash. As long as Turkey sticks to the economic course, the currency is hopelessly lost.

The Turkish lira has fallen by more than 30% against the euro this year. The currency came under pressure in the spring as the global economy began to falter and the tourism industry was hit hard by the Covid-19 pandemic. In recent months, however, the price decline has turned into a free fall.

Many parties are exchanging the currency for other currencies due to the threat of US trade sanctions. These seem inevitable if Turkey actually puts the previously purchased air defense system S400 into use. This is very sensitive, as Turkey is a member of NATO and the system was supplied by Russia.

Fighting again
It is not the first time that the country has antagonized the United States. Just over two years ago, an argument over the imprisonment of the American Reverend Andrew Brunson flared up. Even then the lira was the child of the bill. The coin lost a quarter of its value within weeks. After Brunson's release, tensions eased and the lira recovered somewhat.

The coin is now worth a lot less than in October 2018. At the time, you still got 13 euro cents for a lira, while that is now only 10 euro cents. Even if the Russian arms riot with the United States is calmed down and relations with Macron are settled, the currency decline will continue irrevocably in the coming years.

Mopping with the tap open
Monetary policy is the main reason why the lira hits a new bottom with every crisis. Under pressure from ErdoÄŸan, the Turkish Central Bank is choosing to keep interest rates as low as possible. On paper, this is favorable for economic growth. But it would be much better if the focus were shifted to contain inflation.

It has been above 11% almost continuously in recent months. That is more than the current interest rate, which was raised to 10,25% in September. If you keep your money in lira, you will soon notice that the purchasing power of your wealth is being eroded. Until that changes, Turkish aid purchases to keep the lira afloat are nothing more than mopping with the tap open.

Countdown to November 19
On November 19, there will be another chance to change that. Then the Turkish Central Bank takes an interest rate decision. Economists are anticipating an increase in interest rates to 12%. Then the lira will at least get some breathing room. However, this is not a trend break with the gliding flight of recent years.

That will only come when ErdoÄŸan lets the Central Bank steer its own course, or when his term ends in 2023. Although the most likely scenario is that a real currency crisis is also averted this time, it is obvious that the currency will come under pressure again sooner or later. But that's nothing new for a coin that has already lost 80% of its value in the past decade.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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