The Turkish Lira: Story of its fall amid political, economic uncertainty

At an emergency meeting last week the bank hiked its late liquidity window rate, the highest of the four interest rates it uses, by 3 percentage points to 16.5 percent. That followed a 20 percent tumble in the lira this year on deepening concerns about President Tayyip Erdogan's grip on monetary policy.

The Turkish economy still has some strengths factors, which might have probably fallen back a little bit because of the geopolitical conditions and high levels of trade deficit in addition to other issues.

Out of concern of the continuous fall of the Lira, the Turkish central bank made a step to simplify the monetary policy. Where the repurchase rate will be the main interest rate for a week, which is a level equal to the current financing rate which is 16.5%, which slightly reduced the losses of the lira.

Similar as other countries, the Turkish currency reflects the economic performance and political and security stability. The continuous fall made it on top of the worst performing currencies since the beginning of this year.

The fall of the Turkish Lira took place over the whole past ten years, witnessing record falls, where the dollar was worth 1.16 lira in 2007, which was one of the highest levels of the Turkish currency against the dollar. The currency dropped down 2 Lira for each dollar in the first time in September 2013, then continued falling to break the 3 Liras against the dollar limit last September, before it goes back to fall to the level of 4.7 Liras against the dollar.

As for the Turkish Lira’s losses during the current year, it lost about quarter of its value since the beginning of 2018, where the exchange rate at the beginning of the year was 3.79 against the dollar, while its value reached on Monday, 4.70 against the dollar, which means that its losses reached 24.16%.

There is no doubt that there a number of reason behind this fall, including political and some economic reasons.

Raising doubts

According the co-founder of the Market Trader academy for Capital Markets Studies, Amr Abdo, the Turkish central bank data revealed that the deficit reached a record level in the first quarter of this year at 96% annually. During last March the deficit reached 54%, which is considered one of the main reasons behind the fall of the Lira. As the government did not succeeded in controlling the increasing deficit levels.

The raising doubts about the ability of the Turkish economy to recover, and the doubts about the political and security stability are the second main reasons behind the fall of the Lira. Where these doubts makes the foreign and local investors refrain from injecting more investments, which makes a pressure on the currency.

According to Abdo, these doubts, do not only retrain injecting investments but also the exit from the current investments. With the increase of these operations or what is known by the simultaneous exit, it deepens the currency crisis and increase sales or purchase for the dollar.

The third main factor is represented in the increase of the interest rate and the dollar as well. As the emerging markets expand in borrowing, like Turkey, thus the debts had raised for these countries including Turkey and Argentina, in a way that began to impact the economic performance.

Abdo believes that the political intervention in managing the economic files is considered as one of the reasons of the Lira’s fall, some of which are related to the interest rate.

The central bank also purchases large amount of gold since the beginning of last year. According to the Central bank data; 200 tons of gold has been purchased since the beginning of 2017 until the end of the first quarter of 2018.

The fifth main factor behind the Lira’s fall, is due to the increase of the Oil prices. As per Abdo; Turkey imports large amount of its Oil needs, the increase of the Oil prices used about 0.7% of the of Turkey’s gross domestic product (GDP).

Turkey imports about 90% of its oil needs, that’s why Oil price negatively impacts the Lira.

According to the US Energy Information Center, Turkey imported 99% of its natural gas needs by 1.7 trillion cubic feet, 57% of which is from the Russian company Gazprom. While it imports Oil from Iran and Iraq which had the biggest share of the Turkish oil imports.