Dusseldorf, Istanbul Two years ago, one US dollar cost around seven lira in Turkey. It is now almost 18 lira. And currency experts reckon that the lira could soon break this mark as well. Then there is a threat of a downward trend that can hardly be stopped.
The psychologically important brand is gradually being approached, wrote the Turkish newspaper Cumhuriyet, which is critical of the government, on its front page on Friday. Everything becomes more expensive.
Inflation is 79 percent, the key interest rate is 14 percent. “Many prefer to spend everything now before it gets even more expensive,” says a saleswoman at the world-famous bazaar in Istanbul. Because it could get worse.
For almost two weeks, the currency analysts at Commerzbank have been warning of the next slide in the Turkish lira – although the Turkish currency has already slipped around 35 percent against the dollar since the beginning of the year.
The probability of an accelerated exchange rate development is increasing because the currency has already set a new negative record on a closing basis and is approaching the psychologically significant level of the current 18 lira per dollar.
Then there could be a large-scale switch by investors to short positions – i.e. bets on further falling prices. That would make the lira rate slip even more.
Lira-dollar rate: Important marks broken
The weak currency brings serious problems. As in Germany, the prices for electricity and heating in Turkey are becoming more and more expensive. This is a problem for citizens as well as for suppliers and the state.
The opposition politician Ahmet Akin from the republican CHP warns on Turkish television: “The more the currency loses value, the faster we are racing towards a payment crisis in the electricity sector.”
The Turkish lira is also important for the German economy. There is German capital in 7,000 companies in the state. Several DAX companies such as Mercedes or Bayer produce in Turkey, and almost all of them sell their products there.
If the lira falls, not only end customer prices have to be adjusted. The entire balance sheet slips as a result and has to be constantly readjusted. In times when inflation in Germany is 7.5 percent, this is not only doubly complex, but also an economic risk.
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A look at the dollar-lira chart shows that there have already been price surges at several brands this year. The best example is provided by the mark of 15 lira per US dollar in May 2022.
When the greenback surpassed 15 lira on May 9, eight trading days later it was just under 16 lira – a rise of 6 percent in a short period of time. A similar dynamic was shown by price developments after overcoming the 16 and 17 lira marks.
This development is related to the high interest rates in Turkey. Because these values are lucrative at first glance and range from a return of 18 percent per year with a term of three months to 22.82 percent per year with a term of three years. Hardly any other country pays similarly high interest rates.
But what use are high interest rates if a weak currency negates this advantage? According to Ulrich Leuchtmann, senior foreign exchange analyst at Commerzbank, “investors always get out when the momentum, the momentum of the downward movement, is high enough to make them forget the high interest rate advantage”. And this development apparently always begins with smooth tokens, causing the lira rate to slip more significantly.
Central bank lost trust
In addition, times are tough for emerging market currencies. On the one hand, like the industrial nations, these countries are struggling with significantly rising prices. On the other hand, the flight from riskier assets means that the emerging market currencies depreciate against the dollar and import further inflation.
Which currencies hold up better in these times depends on how the central banks of the respective country deal with the dangers of inflation. If they credibly defend their inflation targets, the currencies can hold their ground better despite the economic risks.
And it is precisely on this point that the Turkish central bank made mistakes, according to the Commerzbank currency analysts. Because in the past year and a half it has lost its credibility in terms of fighting inflation.
In recent months, the government has tried a number of things to stop the lira’s decline – raising interest rates was not one of them. It has been 14 percent since the end of 2021, although the inflation rate has long been higher.
Instead, the government has been guaranteeing all savers a so-called exchange rate hedging interest rate since December: Those who save in lira receive such high interest that the exchange rate in dollars is secured.
This is intended to prevent Turks from exchanging their money. This is paid for with tax money.
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The product is widely used, but mainly by private individuals. Companies with export business still preferred to invest their income in euros or dollars.
In June, the Treasury Department issued a circular demanding that companies with foreign currency deposits of more than $1 million stop receiving loans. This is intended to indirectly force them to exchange their sales for the national currency.
Inflation: The government is happy, the citizens are angry
The anger in the economy was great, as several Turkish and German managers from the country anonymously confirmed to the Handelsblatt. “With such measures, the government is scaring away its last supporters among international investors in the country,” said a German-Turkish industrialist who has been doing business in Turkey for years.
The government can live well with the weak currency for a short time. It boosts exports, reduces unemployment and strengthens the gross domestic product in nominal terms. Incidentally, the high inflation of currently 79 percent ensures that tax revenues also increase with higher prices and higher incomes.
The Turkish Ministry of Finance expects to be able to more than cover spending this year through taxes. Before the elections in June 2023, the ruling AKP will use this to fill its own election campaign coffers.
There are certainly areas in the Turkish economy that are also benefiting from the weak lira. In addition to export sectors such as automobiles, textiles and tourism, this is primarily the financial sector. In the second quarter of this year, the three major Turkish banks Akbank, Guarantee and Yapi Kredi at least quadrupled their net profits compared to the same quarter last year.
For many bureaucrats and politicians in Ankara, this rain of money seems to be obscuring the essentials. The high inflation drives the social division.
Anyone who earns dollars as a manager or earns a share of the rising rental prices as a property owner can afford a new car or a vacation trip to Europe despite the weak currency. However, for minimum wage earners – after all, almost half of all employees subject to social security contributions in the country – it is becoming increasingly difficult to support their own household.
This is reflected in the political approval of the citizens for the government, which continues to dwindle with every increase in the price of butter and petrol. According to the Metropoll survey institute, less than half of those surveyed are satisfied with President Erdogan’s work – and the trend is falling.
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