The Turkish Lira remained relatively stable against the US Dollar for a long period of time. However, in an attempt to prevent the devaluation of the Turkish Lira against the US Dollar, the Central Bank of the Republic of Turkey (TCMB) depleted its reserves using a method referred to as the “back door.”
It appears that there is a perception that the appointment of Mehmet Şimşek as the Minister of Treasury and Finance in the new cabinet indicates a departure from the previous policy. This is reflected in the significant depreciation of the Turkish Lira in the past four days, with a decline of nearly 20%.
Economist Prof. Dr. Oğuz Oyan evaluated the recent depreciation of the Turkish Lira in a program he participated in on SÖZCÜ TV.
Here’s the translation of the key points of Oğuz Oyan’s evaluation:
“The depreciation of the Turkish Lira directly affects inflation. Turkey is an importing country and has a significant trade deficit. The devaluation of the Lira leads to imported goods becoming more expensive.”
“This also has an impact on the entire goods and services market. This situation affects everyone. It affects the budget and it affects companies. But it especially affects households. Companies do not bear such burdens; they directly reflect them in product prices.”
“Turkey is a country with a foreign debt stock of $450 billion. Each 1 lira depreciation of the Turkish Lira against the US Dollar or Euro brings a burden of 450 billion Turkish Lira. In the past two days, the exchange rate has increased by 2 lira. Thus, a burden of 900 billion Turkish Lira has been imposed on Turkey.
Turkey is a country with a heavy burden of external debt.
After the elections, it can be said that there is a burden of 1.5 trillion Turkish Lira. This is a significant figure, approximately one-third of the budget. The government will transfer this burden to the citizens.
For companies with open positions, exchange rate increases can pose a serious problem. If they don’t have foreign currency assets or income equal to their foreign currency debt, exchange rate increases can burden these companies heavily, and some companies may go bankrupt. In the 2000s, some banks went bankrupt for this reason.”
“I think Şimşek will implement a hybrid policy.“
Oyan also made evaluations about the new administration led by the Minister of Treasury and Finance, Mehmet Şimşek. Oyan stated that Şimşek is unlikely to put excessive pressure on the economy due to local elections and that there is a high probability of implementing a hybrid policy.
Oyan stated, “An increase in interest rates means a slowdown in growth and employment. Therefore, they cannot put excessive pressure on the economy. Because there will be elections in 10 months. Mehmet Şimşek will most likely implement a more hybrid policy.”
He further commented, “Şimşek will transition to orthodox policies but will not squeeze the economy too much while carrying out these policies. In this regard, Şimşek may not lean towards clear-cut policies.”
When will interest rates be raised?
Oyan also mentioned that the economic management expects the Turkish lira to reach its real value and can raise interest rates at these levels.
Oyan stated, “The depreciation of the Turkish lira has remained below inflation. It is said that the exchange rate needs to reach around 24-25 for balance. Şimşek is most likely looking at it this way as well. After the Turkish lira reaches balance, they are waiting for the right time to raise interest rates.”