Turkey has never been this cheap

The Turkish lira has had an awful 2016 and in the new year, it did not get any better - the lira had another setback. But there is a big chance that there will be a rebound soon, so says Laurens Maartens of the Dutch Payment & Exchange Company. The Turkish lira lost a great part of its value in 2016 due to the failed ‘coup’ of the 15th of July. The exchange rates of the Turkish lira have shown many lows in 2016, one worse than the other. It even got so bad that the Turkish president Recep Tayyip Erdogan summoned his fellow citizens to exchange their foreign currency for Turkish lira to increase the rate of the Turkish currency. 

This was without result. The freefall of the Turkish lira continues into the new year. In the first few days of the new year the currency dropped almost 2% due to the terrorist attack on the club Reina during New Year and due to the publication of disappointing economic figures. One lira is now worth 0.265 US dollars or 0.25 euro. That is 20% and 18% less than one year ago. This makes the Turkish lira one of the most volatile currencies in the world. 

It is not hard to pinpoint reasons for the freefall of the Turkish currency. The political uncertainty has increased significantly after the failed coup on the 15th of July last year. President Tayyip Erdogan has taken all kinds of measures to improve his grip on power and to arrest everyone possible for the coup or dispose of them in any other way. These measures have had their influence on the economy. In the third quarter of 2016, the Turkish consumers spent 3.2% less than in the same period a year before. The economy shrank by 1.8%, after a growth of 4.5% in the first half year. 

Turkey does not only have a shrinking economy, but also a persistently high inflation. Last week, it was made public that inflation in December increased to 8.53%. That percentage is far above the official goal of 5% that the Turkish banks have set. The inflation is also far above the official interest rates of 8%. Because the inflation is higher than the interest rates in Turkey, the so-called real interest rate in Turkey negative. This makes it unattractive for parties to keep their assets in lira. 

The pessimism about the lira could lead to a rebound of the currency soon. If everyone has chosen their position for a possible further decrease, there won’t be many potential sellers on the market. Due to the strongly negative sentiment, every message that is not as bad as predicted will cause a little bit of relief. In the first days of this year, four of the five currencies that have decreased the strongest in the last quarter of 2016 have shot up quite suddenly: the Japanese yen, the Korean won, the Polish zloty, and the Norwegian krone. The Turkish lira is the only one of the five that has lowered even more. 

The next meeting of the Turkish Central Bank is planned for Tuesday 24 January. The expectation grows that the Turkish Central Bank will intervene in a short time. Even if they leave the interest rates alone, the outlooks for the lira will improve during the coming weeks. There is a big chance that the inflation increase is due to the increase of the tax on alcohol and tobacco. If the inflation falls in January to a point lower than the official interest rate and the real interest rate becomes positive, then it will be less hard to keep assets in lira. For now I would think a recovery of the Turkish currency after the damage it has received in the past few months would be more possible than a further drop.