The weakening of the lira: what is the reason for the largest collapse of the Turkish currency in history

At the auction on Friday, May 8, the Turkish currency against the US shows mixed dynamics. At the beginning of the session, the indicator rose by 0.8%, to 7.17 lira per dollar, after which it dropped to 7.09 lira. 

Uncertainty remains in the market after a massive currency collapse the day before. So, on Thursday, for the first time in the history of observations, the rate reached 7.26 lira per dollar. 

“For the first week of May, the Turkish lira depreciated by 3.5%, and from the beginning of the year - by 22%. This is not only the worst result among all the currencies of developing countries, but also the largest drop since the lira was put into circulation in 1923. The currency crisis in the country was not so acute even in the summer of 2018, when the republic was in a phase of conflict with the United States. This is an unprecedented collapse, ”said Artyom Deev, head of the AMarkets analytical department, in an interview with RT.

The Turkish lira is under pressure amid the rapid spread of coronavirus COVID-19 infection throughout the country. This point of view in a conversation with RT was voiced by the director of the BCS Broker sales office Vyacheslav Abramov. According to Johns Hopkins University, the total number of people infected in the country exceeded 133.7 thousand people, of which more than 3.6 thousand died. 

“Turkey has the highest number of cases in the Middle East, which forces the authorities to impose more stringent quarantine measures. As a result, citizens' mobility is reduced, and production and logistics chains are being destroyed. All this leads to an increase in unemployment, inflation, a slowdown in economic growth and a devaluation of the local currency, ”the analyst explained. 

As noted by Abramov, even the actions of the Turkish Central Bank could not slow down the fall of the currency. To maintain demand for the lira, the regulator is actively selling dollars from reserves, the volume of which since the beginning of the year has fallen by 40%.  

“Also, the Central Bank of Turkey has reduced for banks the limit on foreign exchange transactions involving non-residents. Such a policy led to a panic of investors who began to fear the introduction of new restrictions and began to hastily withdraw funds from the market. If the flight of traders continues, then by the end of the year the local currency may weaken to 8-8.5 lira per dollar, ”predicts Vyacheslav Abramov. 

In addition to the coronavirus pandemic, the lyre continues to be pressured by the threat of the largest economic collapse in 19 years. According to the forecast of the International Monetary Fund (IMF), in 2020 the country's GDP may decline immediately by 5% - the maximum decline since 2001.

“Over the past 10 years, Turkey has had high economic growth rates secured by foreign loans. Investors invested in assets largely due to the high key rate. But two years ago, with the filing of the country's president, the Central Bank began to lower the interest rate to combat rising inflation. The result was the opposite - at the end of 2018, inflation rose to 15.85%, exceeding the key rate by three times. Therefore, in recent years, the Turkish economy has remained afloat not due to direct investment, but due to the large number of tourists, ”Deev points out.

Quarantined Tourism

According to the Institute of Statistics of Turkey, in 2019 the country's income from tourism grew by 17% - up to $ 34.5 billion. At the same time, the Turkish budget received a significant part of this profit (83.3%) from foreign tourists. About 52 million people visited the sea and ski resorts of the republic during the year.

“Against the backdrop of a pandemic and harsh quarantine measures this year, Turkish resorts for foreign tourists will be closed until early August, which will lead to the loss of up to 80% of travelers. As a result, losses for the industry may reach a record $ 25–28 billion. For a country with tourism revenues of 5% of GDP, these are significant losses, ”Peter Pushkaryov, TeleTrade chief analyst, told RT.

At the same time, coronavirus negatively affected the volume of domestic tourism, the expert added. According to him, the population is in a regime of self-isolation, which negatively affects the mobility of citizens, and also leads to a decline in domestic demand.

“Consumer demand is declining, as citizens spend only on food and“ home ”entertainment. The indicator will show negative dynamics for at least a few more months. During this time, the service sector, which accounts for up to 58% of the country's total economy, runs the risk of incurring record losses, which could lead to a 13% decline in GDP in the second quarter, ”Pushkaryov believes.

External support

Real production also occupies a significant share in the Turkish economy, said Vyacheslav Abramov. He estimates that industry accounts for about a third of budget revenues.

“Before the pandemic, Turkey was considered one of the key automakers in the region. Against the background of restrictive measures, many plants were shut down, which led to a decrease in exports by 77%. It is still unknown when the industry will recover, but now car makers are losing, which will negatively affect the country's annual economic indicators, ”the expert points out.

According to economists, the republic can quickly make up for the decline in industry by developing energy projects with partner countries, including Russia. So, in January 2020, the Turkish Stream gas pipeline, designed to supply gas to Turkey and through it through Europe to Europe, started operating on the territory of the republic. According to Peter Pushkaryov, due to the implementation of the project, Ankara buys raw materials at competitive prices, and also makes a profit through transit.

“Moreover, Russia and Turkey are jointly building the Akkuyu NPP, which is designed to provide Turks with access to cheaper electricity. Inexpensive energy resources will allow local industries to reduce the cost of manufacturing goods, which will make products more competitive both in the global and domestic markets. Such cooperation can accelerate the recovery of the Turkish economy, ”the expert concluded.