More Lira Woes?

[Colwyn]

The Turkish Lira is now bumping along at its lowest rate against the dollar since the few days leading up to, and just after, the big Central Bank interest rate hike at the end of January 2014. OK, it has had a good day today, but the US Federal Reserve has said it may well stop pumping money into the financial markets via bond purchases in October if the US economy continues to look good. This is predicted to negatively impact on "emerging economies" of which Turkey is most fragile. With a long-term current account deficit on trading Turkey depends on a lot of international investment (and/or "hot money"   pouring into the country. If the tap is shut off on this stream then Turkey is going to be in more financial trouble.

Will the TL drop further? Or will the Central Bank go for another big interest hike - and put the brakes on Turkey's economic growth? How would this go down with President Erdogan? I think prospects, more likely than not, are that Turkey is in for a bumpy financial ride in the next few months

[darmontie]

In your opinion are we looking at the exchange rate for the pound against the lira rising or falling?  Will those holidaying in Turkey be happy or those who have had sterling invested in banks for some time be happy?

[Colwyn]

The likelihood, as I see it, is that the lira will be weaker against the pound. So you will get more TL for your £. In the short term, good for British tourists and for expats drawing UK pensions on investment incomes paid in £. Short term, bad news for expats with capital held as TL. Of course, this is only my hunch. It depends on a lot of things I don't know. In fact it depends on things in the future that no-one knows. In the longer term, a weak TL may be good for Turkey - attracting more tourists, making their exports more competitive and thus boosting the economy. It is usually swings and roundabouts in these things unless the wheels fall [please forgive wildly mixed metaphors].

[Colwyn]

Anticipating pressure on TL the Turkish Central Bank increased its currency support at the end of September. It increased foreign exchange auctions {i.e. selling foreign currency and buying back TL to protect its value on the money markets} from $10 million per day to $40 million. Despite the fact that TL is at an 8 month low this policy seems to working fairly well short-term since TL is dropping relatively slowly - from $/TL 2.258 on 26th September to 2.287 today {1.3% drop for TL}.

http://www.hurriyetdailynews.com/turkish-central-bank-to-increase-daily-foreign-exchange-auction--.aspx?pageID=238&nID=72203&NewsCatID=344

[usedbustickets]

Colwyn points out that there are some benefits in a falling lira, cheaper exports, tourist rate etc., but there is a price to pay for this and that will be paid, by and large, by those who can least afford it in Turkey, while the rich elite will probably get wealthier by ducking out of the TL.  The situation is not helped by Reg and his lacky Prime Minister putting political pressure on the Turkish Central Bank to cut interest rates further to provide short term boost in growth - so improving the AKP's rating - before next year's general election, and proposed changes to the Turkish constitution.  Still in the main the poorer end of Turkish society voted AKP, so some might argue they may even deserve what is happening and also coming.

This article on the Turkish Economy is also worth a read.

http://www.al-monitor.com/pulse/originals/2014/10/turkey-stock-market-alarming-external-domestic-risks.html

[Colwyn]

Still in the main the poorer end of Turkish society voted AKP, so some might argue they may even deserve what is happening and also coming.

Unfortunately I agree with your prediction of the impact of present financial situation on Turkey's poorest but I am not inclined to blame voters for being deceived by politicians; I think we have all had experience of that. In the UK it is much easier for a party that blames worsening economic conditions on, say, "immigrants" than it is for a party that tries to explain the complex economic motors that have led to a redistribution of wealth from poor to rich - if there is such a party. Similarly, in Turkey,  Erdogan can more easily explain away worsening economic conditions for the Turkish working class by pointing to machinations of anti-Turkish foreign agents and governments trying to break the "New Turkey" than it is for a party that tries to explain the underlying weakness in the Turkish economy after years of apparently bouyant performance - if there is such a party. Neither Labour nor CHP have have been very successful in their respective countries.

The impact of a declining currency may also affect the middle layers in Turkish society. I suspect that Erdogan's "economic miracle" of the 2000s was largely built on credit - credit which becomes harder to repay as interest rates rise. Between 2002 and 2013 the ration between household debt and household disposable interest rose from steeply 4.3% to 55% {the ratio is even more scary in the UK but at least our currency isn't losing value}. You can see the results simply by looking around. When CBF was launched the roads were full of vehicles that in the UK would be impounded as derelict wrecks; now roads are full shiny new or nearly-new cars. The biggest growth sector in tourism in Turkey is Turkish tourists. They stay in flash sea-front hotels, and spend significant money in restaurants {not 4 cay and one lamacan between the family}. Mortgages are available. How much of this is based on credit? What happens if {when?} the bubble bursts. Realization that banks had lent huge amounts of money to people who couldn't realistically be expected to be able to repay it caused the crisis of financial capitalism in advanced economies in 2007. Are emerging economies, including Turkey, facing the same prospect?

http://www.ft.com/cms/s/0/0b9b66bc-cc98-11e3-ab99-00144feabdc0.html
http://blogs.ft.com/beyond-brics/2014/05/15/tackling-turkish-debt-will-it-work/

[KKOB]

The one important factor that's not being addressed throughout this discussion is, what effect all this will have on the EEI (Expat Efes Index) ?

[usedbustickets]

Funny that I have now moved off the Efes to the mighty Tuborg, and I am now wondering why there is not an index for price of Tuborg, how about Tuborg Index Tracker ?  

Shock news as TIT rises to 10TL.

[Colwyn]

You can't have the acronym TIT; this has been reserved for "This is Turkey" [shrug].

[KKOB]

No,no. It'll forever be Trotters Independent Trading..