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The currency Crisis- Turkey Angle!!!

 

Over the past one week, an event has grappled everyone’s eyes with a dramatic fall of about 40% in Turkish Lira against dollar denoting the crisis hit by the country. The currency has fallen over 80% on YTD basis. Now, one would wonder as to what could have potentially gone wrong that led to such a downfall in a country’s currency. While Lira depreciated 30% until July this year, the situation worsened in August only after US announced sanctions against Turkey. The relations between the NATO members turned bitter post the re-election of Recep Tayyip Erdoğan as the President of Turkey. The election triumph also led to the shift from the parliamentary structure of governance to Presidential rule in the state under the new constitution approved last year. The countries were in disagreement over the house arrest of an American pastor Andrew Brunson. The pastor was under the custody of the Turkish government for about eighteen months on terror charges and accused of pastor assisting Gulen in the failed July 2016 Coup. While pastor was charged with a continuing detention on July 18, Gulen continued to be in exiled in the US. On Trump’s tweet calling pastor’s continuing detention ‘a total disgrace’, Turkey offered to exchange pastor against the extradition of Gulen. Washington rejected the proposal and within a week demanded to free the pastor or face large sanctions from the US. The first round of sanctions was aimed at the interior and Justice Ministers of Turkey by US while Erdogan said they will freeze the assets of US ministers in Turkey. On 10th August, infuriated with Erdogan’s stand, trump proceeded to double steel and aluminium tariffs to 50% and 20% respectively which triggered a intra-day slump of over 20% in Turkish Lira only to close at 6.4275, 15.9% lower than previous day closing. Turkey called in for nationalist measures from the citizens by boycotting US products and later retaliated by increasing tariffs on imports from US including passenger cars, alcoholic drinks, leaf tobacco, cosmetics and rice amongst others. Declaration of tariffs and a pledge for $15 billion from Qatar has provided some respite to the ailing currency.

The disaster that ensued from the US-Turkey row should also be seen in the overall light of the economic fundamental strength of the Turkey’s currency. It’s not that the only driving factor was the spat between the two countries; it was also the weak fundamentals of the Turkish economy. In the recently announced inflation data for July, the rate stood at as high as 15.85% which is only bound to increase post the fall in their currency. As of March 2018 Current Account Deficit stood at 6.27% of its GDP while its Fiscal Deficit stood at 1.63% of GDP. Turkey’s External debt as a % of GDP stands at 54.8%. The prevailing interest rate in Turkey is 17.75% and unemployment rate is at 9.7%. Now, looking over the whole scenario from a global perspective, such a fall in the value of the currency leads to ripple effect. Starting with the Turkish-Lira, such crisis often leads to external capital being withdrawn on the fears of bankruptcy and possibility of imposition of capital restrictions (as a safety measure) by the government. Also, such a series of event also hurts the sentiments of the offshore investors towards other economies and leads them to safer and stable economies like US Dollar or Japanese Yen. This would further explain to us the rise of 1.5% in dollar index post the Lira crash and Yen standing strong against dollar while getting stronger against INR by 2.5% since August 9, 2018 close. In fact the dollar index has risen by 4.35% YTD amidst the global uncertainties led by a possible US-China trade war amongst others. India, being an emerging economy, also felt the wrath of the event where the Indian Rupee depreciated by 2.4% from August 9 close to make a new high of 70.42. The Indian rupee was further impacted by the rise in Current Account Deficit to $18 billion in July, highest in last five years due to higher oil import bill.

Pratik Poddar

Author: Pratik Poddar

Pratik Poddar is a Fundamental Research Analyst at Narnolia Research. His forte is finding next growth ideas in mid cap stocks universe. He is a member of Institute of Chartered Accountants of India.

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