Some things never change. And in some cases that’s pretty unfortunate. The Turkish lira has been steadily plummeting for … God knows how long. Moreover, there are no signs of this decline stopping, therefore some analysts predict an impending collapse of the Turkish currency. But let’s not get ahead of ourselves – let's start from the beginning.
The country has been going through a financial and economic crisis since 2018. Initially, the average exchange rate stood at 4 liras per dollar, whereas today it has escalated to 20 liras. In just five years, the US dollar has surged against the lira – by a whopping 338%.
Despite all economic troubles, US dollar seems to fare well. However, in the light of the recent events concerning the national debt and the protracted negotiations of the US authorities, it seemed reasonable for many investors to turn to the good old precious metals like gold aka XAUUSD. For those who want to keep track of the USD ups and downs, DXY chart will come in handy.
Getting back to the subject, the economic collapse in Turkey was in many ways caused by rapid inflation, and rising borrowing costs. The crisis is driven by excessive account deficit, indicating that the country imports more than it exports. Additionally, it is burdened with large amounts of private foreign-currency-denominated debt, in addition to an unconventional interest rate policy set forth by the Turkish president, who believes that low interest rates reduce inflation. The world's central banks, on the other hand, are raising the rate to combat rising prices.
Speaking of the president, on Sunday Recep Erdoğan entered his third decade in power, beating the opposition candidate in the race for the presidency. And while he was enjoying congratulations, Turkey’s lira sank to a fresh record low. In fact, the mere prospect of Erdoğan going for another presidential term has hit the Turkish currency hard. Experts predict that the lira could drop by 29%, reaching 26 liras per dollar, and potentially trade at 28 liras per dollar by the end of 2023. Such forecasts are based on the assumption that Erdoğan will continue to keep the central bank's key rate at an exceptionally low level, which is unpleasant for foreign investors. This approach, coupled with the authorities' intervention in the economy, has already led to foreign capital outflow - since 2013 the share of foreign assets in Turkish stocks and bonds has declined by about 85%.
In summary, we see ineffective monetary policy, 40% inflation, public discontent, and apprehensive faces. Clearly, the existing economic model is ineffective. Many would like to believe that the current president realizes this, and the transition to a more traditional policy won’t be far down the road.
No one can guarantee that a change of course will dramatically transform the situation. In the short term, maybe. It is advisable to conduct a comprehensive analysis before making any asset purchases or sales. Forex is a tricky thing, which means that relying on one's own knowledge and analysis is the only option.
