Key Takeaways
- Turkish Central Bank’s net forex reserve crashed below zero.
- The Turkish Lira has lost 90% of its value versus the U.S. dollar in the last decade.
- Analysts predict a gloomy perspective.
YEREVAN (CoinChapter.com) — The May 28 re-election of Recep Tayyip Erdogan as the President of Turkey risks exacerbating the country’s financial collapse, where the so-called “Erdoganomics” is the king.
One important thing to note! As the reader, you will inevitably suffer a mild form of thought dissonance. Because the present monetary policy enforced by Erdogan, a.k.a. Erdoganomics, goes against conventional economic methods.
So with that being said, let’s explore.
Background Recap
Over the past decade, the Turkish Lira has experienced a collective loss of 90% in its value, mainly due to Erdogan’s lower-interest rate monetary policy. The President believes it would stimulate economic growth and lower inflation, as opposed to a broader economic view.
This attitude toward interest rates partially finds its roots in the traditions of Islamic Banking, which fundamentally prohibits payment via interest rates. Notably, the Turkish leader has associated with Islamic political tenets and Quranic views on finance.
Erdogan even fired previous ministers for not complying with his vision, including his own son-in-law.
As a result of this Voodoo economic policy, the Turkish core inflation — as of April 2023 — was 45.48%.
The Latest Lira Crash
On May 22, the Turkish Lira fell under 20 against the USD on foreign exchange markets. This marks a historic low for the currency in its history, three days after the Turkish Central Bank’s net forex reserves dropped below zero for the first time since 2002 — to minus $151.3 million.
This decision-making is to combat Turkey’s intense dollarization. This USD dominance stems from Turkey’s long-standing issue of trade deficit. In simpler terms, it’s when a country imports more than it exports.
In particular, Turkey’s foreign trade deficit widened by 44% in April 2023 compared to last year. This gap measured up to $8.85 billion in value.
Forex demand amongst Turkish nationals is at an all-time high, even before the May 14 elections.
Evidently, the Turkish citizenry trusts more in USD than in its national currency. The logic is that holding USD seems a more sustainable option in comparison to the falling Turkish Lira.
Morgan Stanley Analyst Further Turkish Lira Decline
Hande Kucic, a strategist at investment bank Morgan Stanley posited that if the monetary policy of Erdogan won’t change post-election, that can lead to a 28 TRY per 1 USD catastrophic conversion rate.
In Kucic’s opinion, the Turkish leader most likely won’t allow higher interest rates to tackle hyperinflation. Therefore, the Turkish Central Bank will resort to more ”unorthodox” approaches like further Lirazation and reserve management strategies.
Lastly, the strategist concludes that Erdogan won’t change his policy and that the Lira will continue to depreciate much sooner than expected initially.
“The risk is that this level is reached sooner, with a higher USD/TRY level by the end of the year, closer to 28, absent a change in policy direction, particularly on interest rates.”
3 Possible Scenarios for the Turkish Economy
Money & Macro, a YouTube-based financial news channel, proposed three possible directions of how the Turkish economy can go forward.
In the first scenario, Turkey will delay the Lira devaluation by increasing its borrowing from Arab countries. Simultaneously, the country will restrict bank lending to citizens.
The second scenario involves Erdogan changing his ways and raising interest rates to avoid an inflationary disaster. DUH!
This plot also includes a possible IMF loan as a relief for the Turkish economy and austerity measures in efforts to stop the fall of the Turkish Lira. Money & Macro estimates the possibility of this framework to be 10%.
The last scenario is when the Turkish government refuses to enact any change whatsoever. That will likely result in an economic collapse. Disaster will ensue not only for Turkey but the region too.
Money & Macro assess the probability of the said outcome to be around 45%.
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