News of Turkey's deteriorating currency aligns with Stratfor's 2017 Annual Forecast, in which we mentioned how the lira's continued instability will spook investors, who are already alarmed by the country's political crackdowns.
The value of Turkey's currency, the lira, rapidly depreciated to record lows today, falling to 3.97 against the U.S. dollar. In an effort to not breach the unprecedented rate of 4 lira to 1 dollar, Turkish President Recep Tayyip Erdogan instructed his ministers to prepare urgent measures to bolster the currency over the next few days. On Nov. 21, Turkey's Central Bank cut its borrowing limits to sustain the lira's value, reduce liquidity and avoid a financial meltdown.
Leading up to the next Central Bank meeting on Dec.14, Erdogan, along with other policymakers, will likely engage in a heated debate over what measures to take next. Historically, the president has been reticent to raise interest rates, preferring to meddle with his country's monetary policy in ways that restrict the Central Bank's ability to take preventative measures in step with global market dynamics. However, the currency slide has Erdogan concerned about the damage it could inflict on the economy. Turkey depends on high levels of domestic consumption, and without purchasing power and consumer confidence, Turkish citizens' trust in the government could falter.
Without purchasing power and consumer confidence, Turkish citizens' trust in the government could falter.
The origins of the currency slide come from within the country but some of the latest drivers of the trend are external. Turkey has one of the world's most fragile economies, largely because the country is heavily reliant on short-term hot money flows. Dependence on short-term profit makes Ankara highly sensitive to global capital flows. This was the case in 2013 when the United States announced a tapering of its Quantitative Easing program, and international capital flooded into the United States — and out of emerging markets such as Turkey. At that time, Turkey was one of the so-called Fragile Five countries that had difficulties adjusting to changes in U.S. economic policy.
Ankara faced the same problem in 2016 when money again flowed into the United States, driving up the dollar as part of the "Trump Trade." Following a year of dollar depreciation, it's no surprise that the lira's own depreciation coincides with a mini-resurgence in the greenback. In early November, the ratings agency Standard and Poor's released a list of the new Fragile Five countries. Of the five, Turkey was the only country from the 2013 list that remained. The other four countries — Brazil, India, Indonesia and South Africa — mended their economies and were replaced by Argentina, Pakistan, Egypt and Qatar. If Turkey is to escape its economic funk, Ankara may want to consider changing its approach.