Who and what is moving the Turkish Lira?: Analysis

Soner Kistak

The Turkish lira has witnessed some dramatic price movements in August 2018. Needless to say, changes in capital holdings can significantly explain price variations. While we need to wait until the end of the quarter to see foreigners’ capital holdings movements, particularly for August, we can already analyze capital trends between the beginning of the year and end-July. Based on this analysis, we can develop some understanding of the geographical locations of financial players making these movements. The Turkish lira lost around 23.51% of its value between January and July 31 of 2018. Moreover, between the 1st and the 17th of August it lost another 16.82% following the Trump tweets.

Monthly evolution of the Turkish Lira against the U.S.

Jan-2018                1.18%

Feb-2018               -1.15%

Mar-2018              -3.84%

Apr-2018               -2.75%

May-2018             -10.11%

Jun-2018               -1.49%

Jul-2018                -6.57%

01.01.2018 -31.07.2018    -23.51%

01.08.2018-17.08.2018     -16.82%

Source: Bloomberg.

Before going into details concerning who did what, we should first take a step back and think about what our corporate world could have done differently in terms of financial strategy. This by no means denies the existence of external factors that caused recent agitation. However, if Turkey had been less dependent on external financing and had handled the currency composition of the asset-liability management more effectively, our economy would have been much more resilient against hostile forces. In terms of external financing, as a country, we need to generate more savings. If the population had channeled more savings into our banking systems, the banks would not have needed to borrow externally to finance major business investments. It is true that the USA interest rates have been very low for a very long time and the ample liquidity made the credit in USD terms attractive. 

The growth drive of our corporations led them borrow in hard currency although their revenue bases remained mostly in Turkish lira. This asset and liability mismatch continues to weigh over companies particularly in the current context where the lira is under attack by external players. One lesson that our corporations can learn is the need for more effective risk management, which considers sharp currency movements.

Coming back to the cross-border capital holdings, the table below shows foreigners’ holdings organized by geographical origin. The second column shows the changes in holdings between January and July 2018; whereas the third and fourth columns indicate the holdings at the specified dates. Between the beginning of the year and end-July, around $27.3 billion moved away from Turkish debt and equity. Around $22.4 billion of this change can be traced back to the financial players that are based in the U.S.

While a more detailed analysis is needed in order to make fact-based conclusions, we can comfortably state that these movements partly explain the 23.51% decrease over the previous seven months. As for the sharp decrease in August and its instigators, we will need more data over the next months to be able to come up with reasonable interpretations.

Change in Cross-Border Trends in Turkish Capital Holdings (Debt and Equity). Source: Bloomberg.

Change ($Million)

                                2018 Q1-31.07.2018        Position at 2018 Q1             Position at 31.07.2018

United States         -22’394                              45’191                                  22’798

Eurozone                -1’521                                9’756                                    8’234

United Kingdom     -1’358                               5’595                                    4’237

Switzerland            -632                                  2’642                                     2’010

Norway                    -440                                1’403                                     963

Canada                   -211                                 2’039                                     1’828

Japan                     -144                                 1’037                                     893

Australia                 -121                                 306                                       184

Other                      -539                                 4’711                                     4’172

World                     -27’360                             72’680                                  45’320