The Turkish economy and the parity of the euro-dollar

The euro exchange rate has finally seen a record fall to match the dollar;

Thus, the euro becomes completely par with the dollar, which is its lowest historical level since around 2002, and the euro was also seen below parity, reaching 0.98 against the dollar in some moments.

The EUR/USD parity peaked in July 2008 when the EUR reached 1.58 against the USD, after which it started to decline and recover, but it never came close to its historical peak.

At the beginning of 2022 the euro was equivalent to 1.13 dollars, and as of July 13, the euro reached 1.002 against the dollar;

Thus, the euro has lost about 11.3% of its value since the beginning of this year, leaving many negative repercussions and repercussions not only on the eurozone economy but also on the eurozone’s trading partners such as Turkey, especially since the Turkish economy is highly exposed to the eurozone.

In general, the Turkish economy has benefited for a long time from the strength of the euro against the dollar, but this advantage is currently not available with the parity between the euro and the dollar, on the contrary, with the continued decline of the euro, this will cause new troubles for the Turkish economy, and the deterioration of the value of the euro came at a sensitive time. For the Turkish economy, which has been suffering from successive crises and shocks since the lira shock in 2018, the lira exchange rate has witnessed a dramatic decline since that time, in addition to the rise in inflation rates to record levels in the country since 2002. In general, and on the exchange rate of the lira in particular, in light of the unconventional policies that Ankara insists on, which is to keep the interest rate as low as 14% in light of the continued high inflation rates to 78.6%.

Tourism is a major source of hard currency in Turkey, and its revenues are expected to reach between 25 to 30 billion dollars this year, and about 70% of tourism revenues are in euros due to the bulk of tourists coming from the eurozone, especially from Germany, and therefore the tourism sector will suffer from a decline The value of the euro.

In any case, the rise of the dollar against the euro means additional pressures on some countries such as Turkey;

An important part of its external revenues are in euros, and its external liabilities are in dollars.

To illustrate the potential gain or loss from parity deterioration, we can use the following formula: (exports, tourism, and other components) – (imports, external debt, interest payments, and other external liabilities).

Regarding Turkey, the deterioration of the euro-dollar parity is unpleasant and even bad news, especially in light of the expectations that the dollar index will continue to rise, weakening the euro against the dollar, primarily with regard to foreign trade.

According to data from the Turkish Statistical Institute (Tüik), export revenues amounted to about 102.4 billion dollars in the first five months of this year;

The relative weight of the dollar was about 48%, while the euro accounted for 46% of the export earnings, so the relative weight of the two currencies is somewhat equivalent and the remaining percentage is in other currencies, including 3% in Turkish lira.

In contrast, the import bill amounted to about 145.6 billion dollars;

Turkey pays about 71% of this bill in dollars, 24% in euros, 4% in Turkish lira, and the rest in other currencies that also fell against the dollar.

In order to maintain the markets that pay in euros, the decline in the value of the euro makes Turkish exports cheaper, and this may make Turkish exporters forced to dump as a result of the deterioration of the terms of trade exchange with these markets, while the Turkish economy depends on imported inputs by about 83% of imports, especially energy, The import bill is dominated by payment in the dollar currency, as the energy import bill rose to $39.5 billion in the first five months of this year due to the rise in prices in global markets and the erosion of the value of the lira.

It is worth noting that the current account deficit amounted to about $28.1 billion, which better illustrates the impact of the energy bill.

On the other hand, tourism is a major source of hard currency in the country, and its revenues are expected to reach between 25 to 30 billion dollars this year, and about 70% of tourism revenues are in euros due to the bulk of tourists coming from the eurozone, especially from Germany.

Therefore, the tourism sector will suffer from a decline in the value of the euro, and therefore the decline in the euro means a decrease in the revenues of Turkish tourism companies in euro-denominated deals, as they will be less than expected in liras.

To compensate, companies need to attract more tourists through lower prices, as exporters do.

Also, the decline in the value of the euro affects the external debt balance, which amounted to about 451 billion dollars at the end of the first quarter of 2022, as follows: about 132 billion dollars in short-term debt and 319 billion dollars in long-term debt.

According to the data of the Ministry of Treasury and Finance, about 26% of short-term debt is in euros and about 44.3% in dollars, while commitments in dollars represent about 64.2% in long-term debt, 30% in euros and the rest in other currencies.

Overall, about 58.4% of the total debt is in dollars, compared to 29% in euros.

Locally, the erosion of the value of the lira and the high rate of inflation led to an increase in dollarization rates in recent years, as the position of the dollar and the euro as safe havens was strengthened in light of the continued decline in the value of the lira.

Official data indicate that individuals hold about $149 billion in deposits in the banking sector;

About 40% of it is in the euro.

With the decline in the value of the euro, the dollar's position as a safer haven was strengthened;

Depositors who deposited their money in euros in order to preserve its value tended to convert to dollars, and then the conversion from euros to dollars increased pressure on the exchange rate of the lira.

Therefore, the lira lost about 6.1% of its value from the beginning of July, to currently reach the level of 17.73 pounds per dollar, from the level of 16.71 pounds at the beginning of the month.

Finally, it turns out that when the euro is stronger than the dollar, Turkey benefits more, but when the opposite happens, Turkey does not benefit from the parity of the euro dollar, but rather loses the part that it was earning due to the strength of the euro.As the parity of the euro-dollar continues to deteriorate, Turkey loses more, because external revenues have a greater share in the euro, and in external liabilities, the dollar’s ​​share in them is greater, and therefore the deterioration in the value of the euro adds new burdens to the Turkish economy, especially in light of the rise in the dollar index , which may lead to fueling the already high inflation in the country and increasing the fragility of the lira against foreign currencies, especially in light of the Federal Reserve’s tendency to continue to tighten its monetary policy and many countries around the world seeking to keep up with it in order to overcome the strong attractiveness of the dollar and protect their currencies from sharp fluctuations , while Ankara insists on avoiding this trend by continuing to fix the interest rate and keep it unchanged, as happened in the last session of the Central Bank.