November may have been the worst month for the Turkish Lira

November may have been the worst month for the Turkish Lira, as it retreated the most within a month’s time, at least since May 2007, losing around 40% of its value against the USD, but similar movements were observed also against the EUR and JPY.

The Lira’s weakening seems to have slowed down in the first days of December, yet the situation is still uncertain as the fundamentals behind the drop are still in play and could reignite the selling frenzy for TRY.

Overall, we tend to maintain our worries for the Turkish economy as it could play a key regional role at a geo-strategic level as well.

At this report we will be discussing the state of the economy in Turkey, as well as the current Government’s policy of low rates, in conjunction with its monetary outlook and any possible side-effects especially in the local and international political scene.

CBTs’ one week repo rate line looked more like a roller coaster

The Turkish economy has been growing for the past 10 years, with exceptions being noticed at the end of 2018-beginning of 2019 as well as a big hit being suffered in Q2 2020, the last being mostly due to the pandemic.

On the other hand, inflation in the past 10 years has been higher than in developed countries and the country had experienced a peak in inflationary pressures in 2018 when the headline rate had reached 25.2% yoy, in October 2018.

Inflationary pressures had receded in the 2018 and 2019 hitting a low point 8.55% yoy in October 2019 and stabilised around 10-12% yoy only to start accelerating once again since October 2020 and reaching 21.31% yoy last November.

The acceleration of the inflationary pressures reflects exactly the depreciation of the buying power of the Lira and a number of analysts have blamed Central Bank of the Republic of Turkey’s (CBT) easing monetary policy over the past few months.

Efforts of the Turkish Government seem to focus on the possibility of foreign investments

CBTs’ one week repo rate line looked more like a roller coaster than anything else since mod-2018 until today as the bank had preceded with consecutive deep rate hikes and rate cuts from the highs of 24% to the lows of 8 ¼ %.

The movement reflected on the one hand the need to raise interest rates to fight inflation and on the other hand, the Turkish government’s will for lower rates to boost growth.

It should be noted that the Bank’s Governor was replaced a number of times as did some of the bank’s board member in October as the Turkish President insisted on keeping rates low.

The latest Governor, Mr. Kavcioglu, is even reported to have defended the low-rate policy and that he had stated to investors that the effects of the recent policy easing are to be felt in the first half of the next year.

It should be noted that the bank has signaled that another rate cut could be performed in the current month before halting the easing policy in the next year, at least in an aggressive form.

We mentioned that the Lira has stabilised in the past few days, actually early this month, in our prologue.

What we had not mentioned is that the CBT was forced to intervene in the markets to support its currency by buying extensively the Lira.

Yet the bank’s reserves in foreign exchange have been in a declining mode since the start of November and they are not endless.

Given the fact that Turkey’s current account balance with few exceptions has been a deficit for the past 10 years on a monthly basis, the possibility of the Turkish Lira continuing to devalue is still present.

The effect of current account deficits seem to be amplified, as on the one hand it devalues the Turkish Lira which in turn raises the cost of imports and thus accelerates inflation rates further devaluing the Lira even further.

It’s like a negative spiral the Turkish economy may have a hard time coming out of. At least not without outside help.

That’s why the efforts of the Turkish Government seem to focus on the possibility of foreign investments in Turkey.

It’s characteristic the United Arab Emirates (UAE), which used to be old foes with Turkey have now made a 180 degree turn and recently outlined plans to launch a US$10 billion fund to support investments in Turkey.

The fund is to support sectors of the economy such as electricity, food and healthcare.

It was characteristic that the Lira had found some support during the visit of UAE officials in Ankara and the announcement of the UAE plans, in a clear sign that the situation is not irreversible, as the markets paid attention.

Yet is Turkey going to be able to secure enough funds to get out of the negative spiral? It should be noted that the Turkish President is to visit Qatar, an ally of Turkey, in an effort to enhance cooperation between the Turkey and Qatar.

Should Turkish President Erdogan actually strike another deal which could be supportive for the Turkish economy we may see TRY bears having second thoughts.

Turkey’s President has to save the economy and is up against a ticking clock

However one cannot take look at Turkey’s situation without taking into account Turkish President Erdogan.

The Turkish President is currently the ultimate power player in the Turkish political scene, at least until the next elections in 2023.

He is also the main supporter of low rates and has also the power to enforce such low rates as the recent monetary policy history of the CBT can show.

Yet the overall economic mayhem the country has come to, seems to be costing President Erdogan and his party AKP in popularity.

Especially young voters seem to be particularly displeased with the situation as they reportedly are suffering the most from unemployment and young voters are a particularly important demographic group in the next elections, as Turkey is on average a rather young nation.

Overall Erdogan and his party’s popularity seems to be on the retreat, and the situation becomes pressing on a political level for Erdogan as well.

The Turkish Government seems to be trying to deflect public attention towards foreign intrigues and describing the situation as an “economic war for independence”.

The “rally around the flag” effect seems to take a wider turn as the Turkish President tries to invoke patriotic feelings also in relation to other countries and it’s a big question on whether Erdogan is to be able to convince the Turkish people for the validity of his claims.

Should the Turkish economy crash, which is also a distant scenario for now but still plausible, the possible repercussions could be felt beyond the Turkish borders, as in a number of neighbouring countries from bordering Syria in the south, to Greece in the Aegean, while in a wider perspective do not forget that Turkey has signed a deal with the European Union about refugee camps established in Turkey.

At the end of the day it’s questionable how tolerate the Turks are going to be with the current rally in prices, the devaluation of their property and the destabilisation of the economy.

The Turkish President does not have to just save the Turkish economy and reverse its current course, he is also against a ticking clock.