Over the past fifteen years, the Turkish currency, the Turkish Lira (TRY *) depreciated considerably against the US dollar and the Euro.
During this period, inflation was Turkey’s main economic challenge.
The hyperinflational periods which plagued Turkey in the latter half of the twentieth century have now been consigned to the past. Although Turkey’s inflation has now settled to a relatively steady rate of around 8% for the past ten years, this is still some way off the central bank’s target of an inflation between 3-5%.
Turkish inflation since 1970
After a period a relative exchange rate stability during the start of the twenty-first century, additional external factors aside from the domestic inflation can be held to be responsible for more recent exchange rate weakness.
In common with most other major emerging market currencies, the Turkish Lira suffered devaluation (relative to a basket of major currencies including the Dollar and Euro) when former FED chairman, Ben Shalom Bernanke, rocked the financial market’s in 2013 with a statement making first reference to the imminent end of ultra loose US monetary policy.
Since US interest rates serve as an important benchmark for the valuation of emerging market assets, this event led to major capital outflows from the domestic Turkish stock and bond markets.
Consequently, the supply of the emerging market currencies, with the Turkish Lira being no exception, rose rapidly which in turn caused major depreciation due oversupply. Hence the Turkish Lira depreciated by another 25% in the second half of 2013.
A bull with fragile footing
International investors assigned Turkey to a group called the “Fragile Five” (Turkey, India, South Africa, Indonesia and Brazil), who each had an election shortly after Ben Bernanke’s statement and the depreciation that followed.
Despite all of the elections now being over, international investors favoured the outcomes to varying degrees. Investors were particularly favourable, for example, to the result in India along with the reform orientated government under Prime Minister Modhi.
In Turkey, however, the election outcome has, if anything, increased uncertainty in the international investment community. After having an absolute majority for the past thirteen years, the recent election created a hung parliament. Even though rating agencies haven’t changed their position on Turkey, the uncertainty surrounding Turkey at the moment, hasn’t done any favours to the Turkish Lira.
Hence the Turkish Lira depreciated by another ca. 10% in the first half of 2015.
Looking ahead, whilst investors would like to see a more autonomous central bank in Turkey, the major drop in oil prices in the second half of 2014 should now aid Turkey which is a major importer of oil. The recent drop in oil prices ought to help Turkey’s terms of trade and take some pressure off their exchange rate, potentially giving the Lira a boost.
Furthermore, with the stronger Eurozone/German economy (that is, Turkey’s main export market), one can justifiably make a moderatley bullish case for Turkish Lira.
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*Note that in 2005, the Turkish Government removed six zeros from the Turkish Lira (previously TRL), and renamed it to Yeni Türk Lirası (New Turkish Lira) with the abbreviation TRY.
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