A new round of nascent crisis: outflow of foreign investment in Turkey and the fall in the value of the currency

10 July 2020

According to the updated data, the Turkish Lira-dollar ratio has started to fall again. Against the background of rapid outflow of foreign currency and reduction of investor activity, this can lead to a serious crisis.

This week, the value of the Turkish Lira started to decline again – for the first time since a record low fall in may. The June inflation rate was 12.6%, exceeding the initial forecasts. This value is the highest since August 2019.
Kan Selcuki, managing Director of the Istanbul Economics Research center, noted that with the country's rapidly growing external debt, the currency is expected to devalue in the coming months if the state's fiscal policy does not change radically.

The main contradiction lies in the differing views on financial policy on the part of the President and most of the Turkish economists. The latter insist that the process of curbing rising inflation requires higher interest rates. However, Turkish President Recep Tayyip Erdogan believes that raising interest rates is a direct path to inflation. He advocates lowering rates to boost growth and spending, especially after the country was hit hard by the coronavirus pandemic. Its consequences have played a significant role in reducing tourism, which is the main source of foreign exchange income.

Turkey's Central Bank, which is under heavy pressure from the government, has kept its benchmark interest rate unchanged at 8.25%, according to investors. This happened at the time of the last monetary policy decision at the end of June, after nine consecutive cuts of 24% overall, starting from the first half of 2019.

Selchuk also did not rule out the possibility of another currency crisis in Turkey. The Central Bank's currency operations to support the Lira have drained the country's reserves: gross reserves figures, including gold and swaps, fell to $ 33 billion at the end of June from $ 87 billion at the end of 2019.

Risks associated with the financing, on the outside remain a key credit weakness of Turkey. The fall in foreign exchange reserves since the end of February has weakened the confidence of foreign investors and States in Turkey's monetary policy. Since the beginning of January, about $ 8 billion of foreign currency has been withdrawn from the country, and foreign investment on the Istanbul stock exchange has fallen from $ 32.3 billion to $ 24.4 billion.

The outflow of foreign capital is likely to undermine Turkey's economic growth, given that this trend began to manifest itself during the pandemic, when employment and investment levels declined and the Turkish Lira faced severe volatility.