The historic plunge of the Turkish lira (TRY) in recent months against USD (falling as much 55% ytd by end of 17 December 2021) raises a lot of questions about the soundness of the Turkish central bank's unorthodox policies which focus on nothing but growth at a time when inflation and its expectations are obviously beyond targets. Aside from politics and the Turkish central bank’s credibility, the Turkish case adds more fuel to risk metrics of emerging markets (EM), especially for countries sharing Turkey’s same characteristics, i.e. suffering from a chronic trade deficit, relying on external funding, CAD, and an unfavorable debt structure, which entails substantial exchange rate and interest rate risk. While the export-focused growth formula is not new and has been tested in Asia, Turkey’s policymakers face numerous obstacles that will likely stymie their efforts to achieve the same results. On top of all that, even according to economic literature, currency depreciation will not immediately improve the trade deficit but will actually worsen it in the short term. Also, timing is critical for a country grappling with historically-high inflation rates. Lastly, TRY will remain under the pressure of the high prices of imports needed for sticking to President Erdogan’s plan and the debt burden that surpasses FX reserves (c.108% of reserves).
Mona Bedeir
Chief Economist
T +202 3300 5722