Lessons From The Turkish Lira Crisis
A deep dive into the Turkish Lira and the lessons we can take away following President Erdogan's re-election
Hey guys,
May was one heck of a month in markets.
Speeches, debt ceiling, fear, volatility and risk— all at the same time.
A beautiful war.
Anyways, the TRY is a currency I’ve been following from afar as well as the Turkish macroeconomic policy, which happens to be one of the worst I’ve come across.
So I’ll be breakdown the major reasons behind the Lira’s collapse and what lessons you can learn from this:
Turkey’s Macro Climate
From the 1960s to 2022, the average inflation rate in Turkey was 32.6% per year. Meaning that an item that would have cost you 100 liras in 1960 would now cost you 1.06 billion liras by 2023.
Let me put that into content for you, an item that would have cost you £100 in 1960 would only cost you £1,869.39 today in 2023 for the UK. That’s the detrimental power of inflation.
There’s a list long enough to fill the room as to why the TRY has depreciated so much, but I’m going to start with a country that failed to take control of its current account deficit, fiscal and monetary policy.
Over recent years, the Turkish economy has been brought to its knees by bad monetary policy, a weak fiscal policy and running a growing trade deficit. Turkey is a net importer of energy, importing from Russia (43%), Iran (17%) and Iraq (13%), meaning that as energy costs have spiked higher this has worsened the ongoing inflation battle depleting the country’s current account.
Before I break this down let me explain the importance of the balance of trade to an economy, particularly for their currency.
Balance of trade is another term for trade balance. Meaning, the difference in the sum of all imports minus all exports. Pretty explanatory that a trade surplus means that the country is exporting more than it imports and that a trade deficit means the country is importing more than it exports.
Here’s how it affects the exchange rate.