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What's next for the Turkish lira and emerging market currencies?

Publication Date: 20 Aug 2018 - By Manika Premsingh By Manika P.

Environmental, Social & Governance FX & Rates Macro Fixed Income/Credit FX Middle East EU


Recent months have been brutal for the Turkish lira, which has depreciated sharply in 2018 owing to the economy’s weaknesses, altered domestic policy environment and the global economy. After staying largely steady in January and February, the lira started falling from March onwards. On 1 March, its value stood at USD/TRY 3.8, but by August 14, the value of the currency had crashed to TRY 6.91 per USD, declining by almost 82% over the period.

While the currency has somewhat stabilised since, this was not before the lira dragged down other emerging market currencies in contagion. The Argentine peso, South African rand, Russian rouble and the Indian rupee have been some of the big developing economy currencies to suffer the consequences of the lira collapse.

Economy concerns lead lira collapse

Investor nervousness about the state of the Turkish economy is at the centre of the currency's collapse. Even though Turkey showed solid economic performance during the previous year, growing by 7%; a number of weaknesses are rearing their heads. For one, its external debts are high enough to be unsustainable since the country’s forex reserve is limited. Two, the current account deficit (as a percentage of GDP) is also elevated.

Three, inflation is presently running high and is forecast to remain so. Four, there is political pressure on the central bank to keep interest rates low, despite this, which threatens the country’s macro-economic stability. Five, in so far as the current government’s ideas of how to run the economy are at odds with established economic norms, there is now less investor confidence in the Turkish economy. And six, a strengthening global economy, especially monetary policy tightening in the US, creates a bias towards safer haven markets compared to emerging economies.

Broader emerging market concerns overblown

That said however, the relatively fast re-stabilisation of the lira gives some hope. Furthermore, not all is lost for the economy: growth will be slower in 2018 from the previous year, but still remains healthy. Moreover, help is already at hand. Qatar has decided to invest USD15bn into the country, specifically for the financial services sector.

In light of this, and the fact that nothing has fundamentally changed for other emerging economies, indicates that so long as Turkey maintains some stability, the contagion effects will likely be limited on both the economies as well as the their currencies.


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