Don't be fooled by the Turkish lira

The declining lira fuels Turkey's popularity as a holiday destination, but makes life quite difficult for the population. Sunday's presidential election will partly determine whether the lira is in for more pain or whether the recovery is finally set in.

Turkey is well on its way to overthrowing Greece as the most popular sun destination during the May holidays. No less than 29% of the Dutch who sought warmth by plane opted for Turkey in the past period. That is slightly less than the 30% that flew to Greece and quite a bit more than the market share of 23% during the May holiday last year. The increasing popularity of Turkey cannot be separated from the enormous slide of the lira. Anyone who went on a trip with a Lonely Planet or other holiday guide from two years ago noticed, for example, that a euro is now worth twice as much as two years ago.

The fall of the lira is not something of the last few years. Over the past decade, the currency has lost as much as 90% of its value compared to the euro. This makes Turkey an increasingly affordable destination for Dutch holidaymakers. But for residents of the country, the fall in value is a lot less favorable. Due to the conversion of foreign currencies to ever cheaper lira, foreign goods and services are becoming increasingly expensive for Turkish consumers and companies. Rising prices are fueling inflation, which was still well above 40% even after a sharp fall in April.

Unique inflation approach
The central bank usually intervenes if inflation rises too high. In the United States, Europe and the United Kingdom, central bankers have raised key rates sharply. Under pressure from President Recep Tayyip Erdogan – who already fired a whole bunch of bankers during his reign – the central bank has actually lowered the key rate from 2021% to 19% since the end of 8,5. Erdogan is convinced that the benefit of the economic stimulus of lower interest rates outweighs the disadvantage of skyrocketing inflation. For the time being, however, there is little sign of this. Economic growth is unlikely to exceed 3% this year.

The fate of the lira
Turkey will go to the polls on May 14. Erdogan's main challenger is former accountant and opposition leader Kemal Kılıçdaroglu, who plans to take a very different economic course. If neither candidate receives more than 50% of the vote in the first round, a final round of voting will take place on May 28. So before the end of the month there will be some more clarity about the future of the Turkish currency. In the meantime, watch out for the lira. On currency markets, but especially in your wallet. Last week, the Dutch Central Bank warned that a 1 lira coin (converted to less than 5 euro cents) resembles a 2 euro coin.

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.

© DCA Market Intelligence. This market information is subject to copyright. It is not permitted to reproduce, distribute, disseminate or make the content available to third parties for compensation, in any form, without the express written permission of DCA Market Intelligence.