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Opinions Joost Derks

Liracrash: Are Smartphones New Gold?

25 November 2021 - Joost Derks

In the financial world, gold has played the role of safe haven in uncertain times for centuries. After the enormous decline in the lira, smartphones, among other things, seem to be taking over that role in Turkey.

Looking back at the economy in 2021 in a few weeks' time, the advance of the renminbi will undoubtedly stand out. The Chinese currency has already appreciated more than 12% against the euro this year. That is a major setback for companies that import goods from China without hedging the currency risk. They often cannot avoid raising prices. This makes life a little more expensive. However, that is child's play with what is happening in Turkey. The enormous decline in the lira even means that some products are no longer even available in the country.

Eleven lows in a row
The lira shot up 15% on Tuesday to its all-time low against the US dollar. The day before was also a record low. Just like the day before. The currency has hit new lows more than ten times as a result of disastrous economic policies. Under pressure from Prime Minister Recep Tayyip Erdogan, the Turkish central bank recently cut interest rates for the third month in a row. The aim is to stimulate new investment, which can lead to higher economic growth and increased employment. Instead, the central bank should focus on tackling inflation, which has risen to nearly 20%.

Oil on the fire
The central bank's rate cuts are fuel to the fire in this regard. The growing difference between interest rates and inflation makes it even less attractive to hold money in lira. Since the turn of the year, the lira has fallen by a third against the euro. The sharp fall in prices in recent days was even a reason for Apple to remove iPhones and other products from Turkish webshops. Officially, the tech company doesn't give a reason for this, but it's simple to say that Apple prefers not to sell its expensive electronics for liras that you have to wonder what they're worth in a few days or weeks. Meanwhile, smartphones are flying over the counter in local electronics stores, because those devices retain their value better than the local currency.

The new gold
It is a unique development that smartphones are partly given a role within an economy as a means of wealth preservation. In a sense, Apple has gold in its hands. In fact, you might expect that from a company with a market capitalization of more than 2,5 trillion dollars. On the other hand, the Turkish people are the big losers in the free fall of the lira. Last night there were large traffic jams in front of the gas stations, because petrol prices are flying up due to the exchange to the increasingly cheaper currency. In the run-up to the new year, all kinds of investment specialists will tell you what the possible winners are in 2022. As long as Erdogan has the illusion that he is boosting the economy with interest rate cuts without considering the terrible effect of inflation, the lira should also be after the turn of the year to the big losers.

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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