Devaluation of the Turkish Lira

By Ilayda Ozsan

Turkey tops the list of countries whose currencies are losing value. The Turkish Lira has been greatly losing its value against the US Dollar since 2009, reaching an all time low of 3.87 TRY/USD in January of 2017. Despite the record high exchange rate, the expectation of the markets is that the devaluation will not stop anytime soon; instead, it is expected that the Lira will continue its devaluation.

There are numerous complex reasons for the Turkish Lira’s devaluation against the US Dollar. For instance, due to Donald Trump’s presidency, an important amount of capital is expected to leave Turkey, depreciating the Turkish currency. In June of 2016, the Turkish presidentErdogan demanded that the Trump name be removed from the Dogan-Trump coalition complex because of Trump’s anti-Muslim rhetoric. Erdogan later said that he intended to hinder America’s use of the Air Force base in Turkey critical in the attacks against ISIS, once Trump won the presidency.

Another reason for the Lira’s depreciation is the mere expectation that it will lose value. These expectations are formed for many reasons. However, one of the most important reasons for the loss of hope in the Turkish markets is the desecularization of Turkey since AKP, the ruling party, came to power. Recently, debates concerning the presidential system, AKP’s insistence on desecularization, and the expectations of further political polarization and social unrest are all factors increasing Turkey’s fragility.

The reluctance to buy lira may be attributed to Turkish politics. The Turkish central bank has repeatedly cut key interest rates and the government has urged citizens to sell dollars to stimulate the slow economy, but the lira’s narrowing interest-rate premium over dollars proves insufficient against its rapid devaluation.

Normally, a cheaper currency might result in more competitive exports due to cheaper labor and costs of production, or rising tourism. However, Turkey’s economy is driven mostly by domestic demand. Tourist arrivals have fallen sharply following terror attacks and the coup attempt. Turkey has also experienced a very unstable summer of 2016 due to the coup attempt in July. Due to instability, international capital has also already decreased, at a rate that is only increasing with recent political developments and attacks by ISIS.

As a result, Turkey’s overall growth rate for this quarter is expected to be a mere 1.8%. A low growth rate such as Turkey’s brings about the expectation that the current account deficit will continue to grow. Additionally, the unemployment rate is expected to increase, only adding to the number of reasons for the expectation of an unstable future for Turkey, which will be lead to more interest in Turkish markets, which will lead to the further devaluation of the Turkish Lira.

 

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