The unbearable fragility of the Turkish Lira

The Turkish Lira has recently become the worst fragile currency of 2017, even performing worse than the Mexico peso, which has been under big pressure since Donald Trump was elected as the new U.S. president. 

After falling over 10 percent in the first weeks of 2017, the currency has exposed Turkey’s greatest economic risks, from an obvious slowdown in economic reforms to its high dependence on foreign capital and investments to keep the economy afloat. More significantly, all of these are happening at a time when political uncertainties, social tensions and economic slowdown have peaked. 

Nothing happened overnight for the Turkish currency. The lira, along with a number of emerging currencies, started to lose its ground after the U.S. Federal Reserve said it would end the high liquidity party in the global markets in May 2013. Of course, there were several times when the lira was seriously hit in the following years after this date amid many elections, terror attacks and even a failed coup attempt. 

The lira has not, however, faced such a big hit as it saw this past week. 

This dramatic plunge in the Turkish currency’s value has coincided with the launch of parliamentary talks over the constitutional amendment, which has resulted in serious concerns among investors that it will be a key step paving the way for President Recep Tayyip Erdoğan to increase his power in a dramatic manner. And I’m not even mentioning a number of terror attacks that have hit the country. In just the last month, Turkey has been hit by four massive terror attacks. 

The Turkish people, who wanted to forget a terrible 2016 and celebrate the coming of the new year, were all shocked in the first hours of 2017 by an armed attack by the Islamic State of Iraq and the Levant (ISIL) on a top nightclub that left at least 39 dead and 65 injured. 

Moreover, economic activity has decelerated significantly in recent months, almost halting completely following failed coup attempt in July 2016. 

This environment is actually sending very important messages that need to be understood and thoroughly evaluated. 

First of all, when the country’s inflation has been on the rise and the questions over the independence of the Central Bank have risen, nobody should make any comment regarding the rates. It is not good for any country to blame some groups for the worsening of the economic or other situations. Yes, Turkey has tried to overcome a terrible coup attempt, but its officials must accelerate the investigations and uncover the secret links and actions of the organization behind this coup. After such uncertainties are eased, the country will likely start to lure foreign investment once more.  

Second, the government has taken a series of measures to cause a rebound in the economy, but the main point here must be to maintain the rule of law, meritocracy, pluralism, justice, robust bureaucratic institutions and freedom of speech in order to enhance economic recovery and attract foreign investments, as the country’s top bosses have mentioned. 

The Turkish Lira and economy have, unfortunately, been subjected to massive pressure, especially ahead of a Fitch assessment in late January, but they still retain some key structural advantages that must be revitalized. Otherwise, a fatal cylinder for the economy could erupt if businesses cease paying their foreign exchange debts.