Turkey is facing the consequences of another currency collapse

Today we have an example of an exception proving the rule. Indeed it is something so rare in these days of negative interest-rates that I hope you are all sitting comfortably.

ISTANBUL (Reuters) – Turkey’s central bank raised the interest rate in its lira swap operation to 11.75% from 10.25% on Friday, continuing additional tightening steps in the face of a weakening lira after unexpectedly hiking its benchmark interest rate last month.

Following the rate hike in its swap transactions, the lira  rebounded to near 7.90 against the U.S. dollar from a record low of 7.9550 earlier in the day. It had eased back to 7.9375 as of 1010 GMT.

Today is full of hints or more interest-rate cuts in China and Europe but Turkey has found itself raising them again, albeit in an official way. But as you can see the initial reaction in terms of the Turkish Lira was along the lines of “meh”.Actually the Turkish Lira did rally later to 7.84, but that was from another perspective only back to where it was on Wednesday and this morning it is back to 7.89.

Turkish Lira Troubles

It has been a hard year as Bloomberg points out.

Turkey’s lira depreciated to a record against U.S. dollar, decoupling from other emerging-currencies amid mounting geopolitical risks in the region.

The lira fell as much as 0.9% to 7.8692 per dollar, extending losses this year to more than 24%, the second-biggest slide in emerging markets after Brazil’s real.

As you can see that level got replaced and in spite of the unofficial interest-rate rise we are below it now. Regular readers may well recall that the Lira was slip-sliding away and hitting new lows back in the summer of 2018 and the move through 6 versus the US Dollar was regarded as significant whereas now we are on the verge of 8 being the big figure.

Because of the economic links the exchange-rate with the Euro is significant. Indeed some Euro area banks must be mulling their lending to Turkish borrowers as well as Euro area exporters struggling with an exchange-rate of 9.32. That is some 43% lower than a year ago.

Whilst we are discussing big figure changes we see that the UK Pound £ now buys more than ten Turkish Lira.

Inflation Surges

This is the obvious initial consequence of an exchange-rate depreciation.

In August, consumer prices rose by 0.86% and annual inflation remained flat at 11.77%. While annual inflation rose in core goods, energy and food groups, it remained unchanged in the services group. Meanwhile, annual inflation in the alcoholic beverages and tobacco group declined significantly due to the high base from tobacco products

That is from the latest Minutes of the Turkish central bank or TCMB and in fact the impact is even larger in essential goods.

Annual inflation in food and non-alcoholic beverages increased by 0.78 points to 13.51% in August. The rise in annual unprocessed food inflation by 1.51 points to 15.36% was the main driver of this increase.

As important is what happens next and here is the TCMB view.

In September, inflation expectations continued to increase. The year-end inflation expectation rose by 64 basis points to 11.46%, and the 12-month-ahead inflation expectation increased by 45 basis points to 10.15%.

With the ongoing fall in the Lira that looks too low to me. On the other hand I think that Ptofessor Steve Hanke is too high.

Today, I measure #Inflation in #Turkey at 35.67%/yr.

I can see how goods inflation might have such influences but other prices will not respond so mechanically.

Trade Problems

You might think that an ever more competitive economy in terms of the exchange-rate would lead to a balance of payments triumph. However this morning’s figures tell a different story.

The current account posted USD 4,631 million deficit compared to USD 3,314 million surplus observed in the same month of 2019, bringing the 12-month rolling deficit to USD 23,203 million. ( August data).

There are two highlights here. It is significant that the release is in US Dollars and not Turkish Lira. But we also note that Turkey has gone from surplus to deficit about which we get more detail here.

This development is mainly driven by the net outflow of USD 5,347 million in the good deficit increasing by USD 3,948 million, as well as the net inflow of USD 1,179 million in services item decreasing by USD 4,602 million compared to the same month of the previous year.

One factor at play in the services sector weakness is tourism. If we look at the year so far we see this is confirmed by a surplus of US $4.15 billion as opposed to one of US $19.17 billion in the same period in 2019. Another way of looking at this is that 3,225,033 visitors are recorded as opposed to 13,349,256 last year.

The problem here is also what is called the reverse J Curve effect where imports have become more expensive but it takes time for volumes to shift as well as it taking time for more orders to come in for the relatively cheaper exports. At the moment that is exacerbated by the pandemic as for example if we stay with tourism international travel has fallen and with further restrictions possible it may not matter how cheap you are.

Staying with theoretical economics we should be seeing the J Curve effect from the 2018 devaluation but right now as we have noted with tourism practicalities are trumping theory.

Foreign Debt

We get some context here if we note this from Bloomberg.

Meanwhile, Turkey paid a premium as it sold $2.5 billion of debt to international investors on Tuesday, it’s first foray into global markets since February. The bonds priced at 6.4%, compared with 4.25% for similar-maturity notes issued in February.

We note the fact that we have another trend reversal here as most countries have seen lower debt costs whereas Turkey is paying more. The theme of borrowing in US Dollars is a Turkish theme though and in terms of the money raised each one has so far been a success as in it would have been more expensive later. The catch is when we get to interest payments and repayments which have got ever more expensive in Turkish Lira. So if your income is in US Dollars or other overseas currencies you are okay but if it is in Lira you are in trouble.

According to the TCMB here is what is coming up from its July data.

Short-term external debt stock on a remaining maturity basis, calculated based on the external debt maturing within 1 year or less regarding of the original maturity, recorded USD 176.5 billion, of which USD 15.9 billion belongs to the resident banks and private sectors to the banks’ branches and affiliates abroad. From the borrowers side, public sector accounted for 23.9 percent, Central Bank accounted for 11.4 percent and private sector accounted 64.7 percent in total stock.

August saw an outflow from the TCMB as well.

Official reserves recorded net outflow of USD 7,602 million.

They started the year at US $81.2 billion and are now US $41.4 billion.


So far we have noted a financial sector which is in distress with rising interest-rates a falling currency and overseas borrowing in a toxic mix. Let us now switch to the real economy where these will impact via general inflation highlighted by foreign goods and services being much more expensive. So living-standards will be lower. The normal mechanisms where a currency depreciation can help an economy are in many cases being blocked by the Covid-19 pandemic. Only on Friday we observed that the UK has been importing less which is pretty much a 2020 generic. This is added to be the fact that a Turkish economic strength ( tourism) has had an especially rough 2020.

There are other issues here as the continual foreign currency depreciation has led to a surge in demand for safe assets.

A significant part of the deterioration in the current account balance is due to gold imports. This year, gold imports will exceed $ 20 billion. ( Hakan Kara)

Gold of course exacerbates the US Dollar issue as it becomes increasingly important in Turkey. Actually the central bank has joined the game as its Gold reserves have risen by some US $17 billion so far this year and whilst some of that is a higher price it must also have bought some more.

Will more interest-rate increases help? I am not so sure as they are usually much smaller than the expected fall in the currency and they will crunch the economy even further. It would help of course if Turkey was not either actually in a war or acting belligerently on pretty much every border it has. Putting it another way government’s in economic trouble often look for foreign scapegoats.


19 thoughts on “Turkey is facing the consequences of another currency collapse

  1. Yes Shaun and while you dealing with this article. its been revealed the BOE written to the UK banks questioning their preparations for negative rates should they be implemented.

    This is the strongest signal yet that negative rates will be implemented in the UK.


    The BOE however still has a 0.10% leeway in cutting rates before they go negative.

    If they are going to move they need to ,move in the November meeting as Joe Public will need an adrenaline boost to get them to spend before Christmas. In fact its been reported over the weekend shops Manchester seen the busiest trading since last Christmas due to worry over an extended lockdown.

    I forecast a 50/50 chance of a 0.10% cut in base rate in November as against a cut into negative territory.

    The coronavirus spreading now worldwide including China, there needs to be exceptional financial intervention to do whatever they can to protect the world financial system to prevent a meltdown.

    I know many will not agree negative rates is not the way to go but they are on the way imo in the UK brought about by the rapid spread of coronavirus.

    • I certanly beleive negative rates are NOT the way to go because if cutting down from 5% to 0.1 % ( and through the “emergency rate ” of 0.5% ) did not help then why would -1.0% help? or -2.0% ??

      The BIRP is uncharted waters – as I said before ” here be dragons!”

      That they will be tried is a forgone conclusion and proof to my mind atleast , that they haven’t got a scooby .

      Feel free to disagree.


      • The idea that the powers that be haven’t a scooby is overly generous naivety.
        How do you think that they got to be the powers that be?
        By treading on anything or anyone opposing them.
        The establishment is clever, ruthless & evil.
        Getting us to think them stupid is part of their success.

        Btw, it’s off-topic (sorry Shaun) for anyone who thinks that many in high up places can’t conspire:

      • Hi forbin,

        I noted this from the Express today:

        “Jonathan Haskel, an external member of the Monetary Policy Committee (MPC) has said there is “positive evidence” negative interest could be a remedy to the economy.


        I have listened to many arguments over the last year or so stating negative interest rates not worked for Japan as an example, but its like comparing apples and pears from my standpoint.

        I take the view in these exceptional times it may take exceptional measures and those with the deepest pockets take the biggest hit.

        One of the problems negative rates could do is push up asset prices as people spend their cash on such things as property but nothing is certain due to asset prices already ballooned ahead of most peoples expectations.

        I have little sympathy some of these footballers being charged for their money on deposit and with the coronavirus wrecking the world economy a super tax should also be considered imo.

        As for some saying they some of the wealthy will just shift their money offshore then the GOV needs to take measures to prevent this happening.

        The world is in an almighty mess imo at the moment and to be honest I have lsot faith in our country and world leaders to sort this out.

        Consumerism has damaged the world and the now nature is fighting back we are back again to talking about the four horses of the apocalypse.

        I rest my case.

    • I went to the bank today… on this very theme.I heard the news on R4 this morning, if that does not count as a nudge then I don’t know what does. Anyway it was great concern to the teller. I wanted to withdraw some of my own money…shock shock!.

      My request had to be approved by the manager, £X000 in £20 notes. They needed to know, surely if this was a purchase from a car dealer I coulld use BACS… that way the money would stick around “safely” inside the banking system.

      I respectfully responded, nope. Its a private car purchase and the seller wants cash. After 20 minutes of verification etc I was allowed my money. Usefully served in cashier stamped red cellophone bags.

      I can also confirm £1000.00 once rolled, you get a solid tube of cash circa 35mm and 75mm long.

      Just saying. 🙂

  2. SO here we are again, here at the collapse of a currency whose government thought it could get away with unlimited credit expansion and the perpetuation of speculative bubbles with no consequences.All western countries are doing it of course, but the UK has a persistent structural trade deficit that is increasingly reliant on overseas earnings from the city, add in the housing bubble it has been fostering for decades by constantly devaluing sterling, the looming negative sentiment surrounding our crashing out of the EU without a trade deal and the governments insane response to an illness no more deadly than the seasonal flu and all the bases are loaded for sterling to lead the pack of currencies going over the cliff into certain destruction.

    The old arguments in favour of devaluation will be trotted out again I’m sure – “it will boost exports”, but Shaun has already covered that in his article, the rising cost of raw materials and energy far outweigh any gains, and as he points out, there is always a huge lag between the drop in the currency and the orders coming in, by which time the currency has declined further.
    He also correctly points out that interest rate increases don’t work either, as we all know on here, the Bank of England would delay the point at which it put up rates for so long and when they eventually did do it, it would be much less than that required to shore up the £ anyway.Of course they wouldn’t want to threaten the housing market with interest rate increases would they?

    Eventually, when the pound goes into freefall, no matter how large the increases, they won’t work as the damage has already been done, no one wants to hold the currency at any rate and no one will accept it for trade as it will by then be losing double digits percent a week. The Fed has said it will just print and print and cover the government deficit, so guaranteeing the collapse of the dollar, the only other argument I have heard for a stronger dollar is Brent Johnson’s “dollar milkshake theory”,but in the face of government deficits and the fiscal stimulus in the US now being monetised(and the digital coins mentioned below) it gives Trump(assuming he wins) a blank chequebook to spend.

    IT is all leading to central bank digital coins to be paid to everyones account mobile to ensure asset prices do not fall, call it furlough payments, UBI or MMT it all amounts to the same thing. QE has been shown not to work, in fact it is making things worse, money velocity is still falling, so they will now resort to money printing and giving it directly to the people to spend to get money velocity up,so

    Central banks are faced with the total collapse of the west’s monetary system unless they can find a way to keep the debt money system going, the petrodollar recycling of dollars to the US is also coming to an end if the electrification of cars goes to plan, thereby removing a vast demand for dollars, and we have the self imposed destruction due to Covid, this I believe is to weaken the economies of the west to a point where they will accept this new “manna from heaven” with open arms.Words like “deckchair” and Titanic come to mind here.

    Here are the prescient words of Ludwig Von Mises who warned of the dangers of unlimited credit expansions and a graph of the lira against the dollar over the last thirty years, it has gone from buying $380 in 1990 to just 13 cents today.

    “There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”


  3. Hello Shaun,

    well here’s my fantasy wish list for Turkey .

    1, stop the wars
    2, Drop interest rates to 0.1%
    3, encourage a housing boom ( worked everwhere else – so far)
    4, build up Ankara and sell lots of property to Russian business men ( worked for us )
    5, Sell off everything else of value

    There ! worked for us , didn’t it?


    • Hi Forbin

      The Russians have been playing that game in Cyprus though. Would they want Ankara as well? This from the Guardian is from February 2018.

      “Nearly five years on from Cyprus’s near financial collapse and bailout, Limassol is undergoing a property development boom fuelled by Russian money.

      In the marina of the island state’s second largest city, opened in 2014 by the president, Nicos Anastasiades, super-yachts are berthed in front of €15m villas along with their support ships carrying helicopters and other accoutrements of the super rich.

      Look to the marina’s east and the skyline is beginning to fill up with high-rise luxury apartment developments. Look west and by 2021 Europe’s biggest casino resort is due to have opened its doors. The €550m investment aims to attract at least 300,000 tourists and 11,000 jobs.”

  4. Great blog as usual, Shaun.

    You think that Steve Hanke has overstated the Turkish inflation rate. What do you think of his proposal for Turkey to adopt a currency board like neighbouring Bulgaria, linked to the euro?

    Do you or any of your readers know what has happened to Turkish plans to calculate its own owner-occupied housing price index based on the net acquisitions approach? It is a logical thing for a candidate country to join the EU to look at. I found a presentation by someone from TurkStat with the familiar name Erdogan (Cengiz Erdogan) on the web: “OOH – Turkish Experience”, from October 2013, but nothing ese. Has it disappeared into a black hole somewhere, like Ukraine’s HICP?

    • Hi Andrew and thank you

      As to a Euro peg I can see one advantage on the present Club Med members of the the Euro. This is the fact that Turkey has got its currency fall in before joining up. The catch is will it be able to take advantage of that or will inflation fritter it away? Also Turkish domestic savings would look a lot smaller converted into Euros at an exchange-rate of 9.3.I am not sure I am convinced as sooner or later Turkey would probably become another Greece. Anyway if this from the good Professor’s twitter feed earlier today is any guide he may have shifted his position somewhat.

      “It’s time for @RTErdogan
      to establish a gold-backed #CurrencyBoard and smash inflation.”

      Thanks for the song link. When I played basketball we used to warm up with that song playing and also Jump ( for my love) by the Pointer Sisters. You may be spotting a theme there! RIP Eddie.

      • Thank you for your reply, Shaun. I don’t follow Steve Hanke’s twitter feed, but I am on his circulation list for a while since I asked him a question about the Zimbabwean hyperinflation to which he kindly responded. Sorry, I think that was my bad about him advocating a currency board linked to the euro. When I check my files, he wrote an op-ed in the winter of 2020 called “Making the lira ‘as good as gold’”. The anchor was right in the title. I’m not sure why he recommended a currency board based on the Deutsche Mark for Bulgaria in 1997, which morphed into a currency board based on the euro, but wants a currency board based on gold for Turkey, but he must have his reasons.

  5. Re trade and the sensitivity of sales to currency levels….I note Saudi has instituted a boycott of Turkish goods. Saudi being a major market for Turkish goods. That won’t help them.

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