Turks at the Gates! Whats Ailing the Lira!

The Turks have arrived! Turkey’s currency, the lira, has hit record lows, creating a headache for the emerging market currencies over the last fortnight. So what has happened to send the lira on a downward spiral ?

The Background of the crisis

Over the past five years, Turkey’s growth (17th largest world economy) has been virtually keeping pace with that of China and India but it is now displaying the classic signs of overheating: a large trade deficit, a construction boom and soaring debt. Analysts say the financial crisis has been a long time coming and reflects Turkey’s refusal to raise interest rates to curb double-digit inflation and cool an overheated economy.

Financial markets have taken fright at inflation rising at an annual rate of more than 15%,, and the start of increased friction of the Turkish President with the US, and have been selling the Turkish lira, which is down by 50% odd against the US dollar since the start of the year.

It recovered on August 15 on reassurances and actions against speculators but the world suspects that the headwinds may be too strong.

A combination of factors, according to experts, have led to fears the country is sliding into an economic crisis.

Factors ailing the Lira

The President’s Actions!

Much of the recent concern has been fuelled by President Recep Tayyip Erdogan’s economic policy. Mr Erdogan has made sure he controls the reins at the Central Bank which has therefore been unable to carry out what it thinks is right – raising rates. Mr Erdogan is famously averse to interest rate rises and thinks it’s a Western conspiracy to weaken the economy.

Early last month, he claimed the exclusive power to appoint the bankers that set interest rates – and to cement his control he has put his son-in-law in charge of economic policy.

In a recent interview , he asked Turks not to worry as “while overseas investors had dollars, Turks had Allah!”. He has also been asking Turks to embrace Islamisation and thats not going down well either.

The Mountain of Debt

Investors are worried that Turkish companies that borrowed heavily to profit from a construction boom may struggle to repay loans in dollars and euros, as the weakened lira means there is now more to pay back. Analysts at Oxford Economics estimate Turkish corporate debt denominated in foreign currencies amounts to more than 10% of the country’s GDP.

Turkey’s problems are particularly acute because it has more than $300bn of dollar-denominated corporate debt, which is getting more expensive to finance by the day. Other countries – such as Mexico and South Africa – also took advantage of low US interest rates in the years after the financial crisis to borrow heavily in dollars and saw their currencies coming under pressure. The fear is of a full-blown emerging market crisis.

The Politics of it all

Turkey’s Presidential actions have caused worsening relations with the US. Donald Trump’s administration hit its justice and interior ministers with sanctions last week, a reaction to the detention of American pastor Andrew Brunson, who has has been held for nearly two years over alleged links to political groups. In a tweet,  Mr Trump said he had approved the doubling of tariffs on Turkish steel and aluminium.


U.S. debt markets – at least so far – have yet to show any signs of stress related to Turkey’s currency woes. One reason why credit markets may have not run into problems is due, in part, to the fact that U.S. banks have a very small exposure to Turkey’s sovereign debt, with roughly 0.5 percent of their assets exposed to debt tied to Turkey, according to J.P. Morgan Asset Management. In all, U.S. banks have about $18 billion in exposure to Turkish debt, according to the Bank for International Settlements. Another buffer is other emerging market economies have “limited trade and financial ties” with Turkey.

The banks most exposed to Turkey are ones based in Europe, particularly Spain, which held $81 billion in Turkish debt at the end of March, according to the BIS, and France ($35 billion) and Italy ($18.5 billion). Over half of the borrowing is denominated in foreign currencies, so when the lira sinks, debt-servicing costs and default risks rise inexorably.

However, that hasn’t prevented the initial impact from being felt across the globe  as emerging market currencies have depreciated sharply – the USD INR itself is down more than Rs 3 against the USD in the last one month.

Barclays has been the first reported casualty as a trader reportedly suffered a loss of around 15 million pounds ($19 million) from trading Turkish corporate bonds in the last few days


In the two previous Turkish financial crises since the turn of the millennium, European exporters have been able to divert their business to other markets. A bigger danger is that Turkey’s crisis will spill over into other emerging market economies and there were signs that other countries seen as vulnerable were coming under speculative attack.

The history of previous emerging market crises suggests there is only one likely winner in the battle between Turkey and the currency speculators. In the current circumstances, only two things will halt the lira sell-off: a substantial rise in official interest rates (already above 17%) or the announcement of an emergency package of financial support from the International Monetary Fund – or, if things continue to deteriorate, both together. Freeing Brunson would also help. Though embarrassing for the President, this may be the only short term solutions as per market experts.

In an effort to avert the crisis, the Turkish government has taken some measures over the last few days including increased liquidity of its banking sector.

President Erdogan, rejecting economic fundamentals as the cause of lira’s weakness, has said that Turkey was the target of an economic war and has made repeated calls on Turks to sell their dollars and euros to shore up the national currency.

He has urged manufacturers not to rush to buy dollars.

The INR Impact

In a previous blog (https://www.plindia.com/blog/where-is-the-rupee-headed/) we had maintained that the market consensus for the INR was somewhere between Rs 68 to Rs 72 and that’s precisely where we may be headed basis the real value of the currency. A falling rupee helps exports – things like textiles and IT [information technology] services. But it puts up the price of India’s imports, particularly oil, which in turn leads to inflationary pressure and widens India’s trade deficit . The latest data shows that this is beginning to happen.

The South African rand has also taken a hit this week as a result of the Turkish developments, falling 10 percent – down to a two-year low against the dollar.South Africa’s central bank said it was not yet ready to intervene to support the currency.

However, there is one area which is instantly reaping the benefits: tourism. Bookings to Turkey have gone up in recent months – possibly due to the favourable exchange rate. If you want azure seas, ancient temples and a holiday which most likely costs less than it did last year, then the minute you stop reading this blog, get on your favorite site and book a holiday to this lovely destination!


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