According to a note prepared by Morgan Stanley analysts, “the Turkish currency could decline to 26 to the dollar, earlier than expected, approaching 28 lira to the dollar by the end of this year, unless there is there is a change in the policies followed”. .
The Turkish president is adopting an “unconventional” approach in order to curb the rise in inflation rates, through low interest rates. This approach has left markets subject to an “unpredictable” mix of regulation and private intervention, with new measures taken informally and frequently, according to Bloomberg.
Analysts point out that this approach has forced foreign investors out of the Turkish market. This was reflected in the decline in total foreign holdings of Turkish stocks and bonds by around 85%, or around $130 billion, since 2013.
Without a shift in the macroeconomic policy framework to prioritize inflation and adopt market-friendly policies, the Turkish economy remains exposed to greater sensitivity to global shocks.
On Tuesday, the lira fell to a new record low, after briefly touching the level of 20.4295 against the dollar, surpassing the low level recorded last week at 20.0913 against the dollar.
The impact of “unconventional” policies
Amid the series of challenges facing the Turkish economy, Turkish economics writer Naghi Bakir does not disagree with estimates indicating that the Turkish lira is set to fall as much as 29% after the President Turkish Recep Tayyip Erdogan won a new mandate, and in light of the financial and economic policies carried out through him. .
Bakir said in an exclusive statement to Sky News Arabia Economy that “people are resorting to buying foreign currency (as a safe haven to preserve value)…they want to reassure themselves,” light of the current situation. economic policies, and with the estimates associated with the depreciation of the lira.
Analysts take a negative view of the future of the Turkish Lira for the foreseeable future, unless there is a change in Turkish politics. “We have a very pessimistic view on the Turkish lira as Erdogan retained his post after the election,” said Brendan McKenna, emerging markets economist at Wells Fargo. The lira is expected to reach the level of 23 pounds against the dollar by the end of the second quarter, then 25 pounds at the beginning of next year. BlueBay Asset Management’s chief strategist, Timothy Ash, said that “with limited foreign exchange reserves and current interest rates, the pressure on the lira is high.” Professor of Economics at Koc University in Istanbul, Silva Demiralp, believes that “these developments reflect the belief of market players that traditional policies, promised by the political opposition, are the only way out of the Turkish economy. of a potential crisis”.
basic hurdles
In an exclusive statement to the “Sky News Arabia Economy” site, Turkish academic, Muzaffar Shanil, monitors several obstacles facing Turkish politics, which in turn affect the level of the lira.
At a time when Turkish monetary policy is focused on pursuing growth and export competition rather than controlling inflation, and Erdogan supports the unorthodox view that raising interest rates increases inflation, Schnell says there are economic problems President Erdogan has to deal with. And above: High rates of inflation (after hitting an all-time high in a quarter century, before finally slowing down). The crisis of the high cost of living, which overwhelms the Turkish citizen and weighs him down with heavy burdens. Poverty crisis and rising unemployment rate. Balance of payments crisis. Short-term debt repayment record, potential fluctuations and possibility of recession, in addition to potential banking sector crises.
In a related context, he points out that surveys indicate that around 52% of Turkish society consider (poverty, corruption and the crisis in the rule of law, freedoms and cost of living) their main concern.
Since the beginning of the year, the Turkish lira has continued to register more losses, declining by around 8%, losing more than 90% of its value in a decade that has seen various stations between depression and prosperity. economic. Inflation in Turkey had hit its highest level in nearly a quarter century, before rates slowed below the 44% level, April data showed. According to official figures from the Turkish Statistical Institute, inflation in Turkey reached 50.5% in March, after reaching 85.5% in October. It comes at a time when Turkey’s president is pledging to cut rates into single digits, while raising the growth rate to 5.5% by 2024.
Encourage production and export. Support tourism
For his part, the writer and researcher on Turkish affairs, Mahmoud Othman, affirms in exclusive statements to “Economy Sky News Arabia” that the economic file is the first file on the list of priorities of President Erdogan and the next government, indicating that there are expected to be sweeping changes that preserve the approach taken by the Turkish President in terms of interest cuts. The lira currently looks stronger than it should be (valued above its fair price). Turkish exporters complain about the current valuation of the lira. In recent months, the government has followed – perhaps for electoral reasons – a very strict policy in terms of maintaining a stable (high) exchange rate for the Turkish lira. I think this situation is “provisional” until the new government is formed, and then we will see where that government will go (regarding monetary policy and the exchange rate). I expect a depreciation of the Turkish lira in order to open up foreign markets and even out production costs.
Othman points out that exporters insist on reducing the lira by no less than 25%, especially given the high price (which affects the cost of production) as well as government taxes and the trend of increasing wages here. next July, which means a burden for the economy, manufacturers and exporters, explaining that Turkey’s economy is largely dependent on export earnings.
As Turkey seeks to become one of the ten largest exporters in the world, Turkish exports grew by 12.9% to $254.2 billion in 2022, marking an all-time high.
The writer and researcher on Turkish affairs adds an additional factor that supports the downward trend in the lira exchange rate, which is linked to the tourism sector, given that “Turkey is largely dependent on tourism revenue, and this requires the exchange rate of the lira to be appropriate for its value to attract tourists, as well as for it to allow the Turkish exporter to compete in world markets.
He concludes his speech by noting that “President Erdogan has a general strategy which he aspires to implement regardless of global economic models. He wants to go ahead with the reduction of the interest rate in order to encourage production, and this faces certain obstacles during the implementation, but Erdogan insists on this, and the administration will be chosen. “The new economy is based on these trends and in line with the policy of reducing interest rates.
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