Whatever happened to the Turkish Lira?

Turks are now acting as if it came as a surprise. The Turkish Lira has lost around 9 percent of its value against the dollar in a single month. If you take January of this year as the starting point, the lira has lost around 27 percent of its value. Why?

There are two types of countries in the world: Those where the government determines the value of the currency and those where the markets do it. Turkey is in the second category. We are no Venezuela when it comes to the currency regime, nor are we China. The lira has been fully convertible since the late 1980s and it has been freely floating since the 2001 crisis. This means that it acts as a barometer for market forces, and the government keeps a close watch on its movements.  

What happens whenever the authorities do not take the “necessary” measures? The exchange rate adjusts. What happens if the Central Bank is seen as a lame duck and not in a position to raise interest rates when necessary? The exchange rate adjusts. What happens when the investment environment in the country is not conducive? The exchange rate adjusts. What happens when the direction of fund flows changes due to external reasons? The exchange rate adjusts. What happens when the security situation in the country deteriorates? The exchange rate adjusts. What happens when policy uncertainty in the country grows? The exchange rate adjusts. What happens when political uncertainty bubbles up? The exchange rate adjusts. You get the point.

All of that is happening now, and the results are all too clear. Turkey is moving into the eye of the storm, into a position of extreme uncertainty. In an environment where our policy uncertainties are exacerbated by political uncertainties, neither the imminent U.S. Federal Reserve decision nor the rapidly heating up war with the outlawed Kurdistan Workers’ Party (PKK) are going to make the situation easier to handle. If you ask me, Turkey is on the verge of evolving into a hot potato.

If our political leaders were a little less constipated, we might have had a new government after the June election. Alas, they have failed us, and we are heading towards a snap election under a rapidly deteriorating security situation. I’m afraid to say there is nothing to prevent the lira from a free fall.    

Turkey needs a new story line. I once told the story of a “Great Normalization,” in which the characters were moving toward a new democratic order. Maybe they got tired. For a new tale, we need fresh, credible protagonists. The problem is that there is no way for new people to rise to the top. For now, we will only be seeing free falls.