Devaluation of Turkish Lira expected to continue

Devaluation of Turkish Lira expected to continue

With the Turkish Lira’s devaluation against the dollar continuing to accelerate, a new record is broken almost every day. The expectation of the markets is that the devaluation of the lira will not stop soon; in fact, it will only continue. 
Developments in the U.S. are among the most important reasons for this expectation. The wave that started in global markets after Donald Trump’s election to the U.S. presidency is not curbing. In the U.S., the expectation has risen that expenditures will rise. This in turn will cause inflation, which will make the U.S. Federal Reserve resort to interest rate hikes more often. The likelihood that the Fed will hike interest rates in December is constantly increasing. In the latest survey, 84 percent of market players expect a rate hike in December. 

These developments are proof that a capital exit will occur in developing countries. Turkey is among them, so its national currency will continue to lose value.  

It is also true that the lira is being affected more negatively than other currencies. Turkey is at the top of the countries whose currencies are losing value. The expectation that the lira will continue to lose value is quite high both in domestic and international markets. The continuous disruption of Turkey’s economic indicators are among the most important reasons for the negativity surrounding the lira, in addition to developments in the U.S.  

It is estimated that the growth figure for the third quarter of the year, which will be released at the beginning of December, will not be good. The dominant view is that even though the government has taken some new measures, they will not be enough to significantly boost domestic demand. In the fourth quarter, any improvement in growth will not be adequate. 

As a result, the probability has risen that Turkey’s overall growth figure for 2016 may even be below 3 percent. With low growth there is also the expectation that the current account deficit will continue to grow, considered an alarm sign of domestic economic balances. What’s more, the increase in the unemployment rate is also expected to continue.  

Clash with the EU 

The domestic and international political climate that Turkey finds itself in is an important factor increasing expectations for a further loss in the value of the lira. The heating up of presidential system political debates, the government’s insistence on this, and the expectation that this would exacerbate polarization and social unrest is an important factor increasing Turkey’s fragility. 

Finally, Ankara’s showdown with the EU has increased tension both in the international and domestic markets. The “economic sanctions” statements from EU officials and the government’s severe reaction to them have created the risk of a disappearance of the EU anchor, which remains one of the most important foundations of Turkey’s economy. 

In other words, the administration’s economic and political decisions are accelerating the devaluation of the lira. As a change in the government’s decisions is not expected, we can safely say that the coming period will be even tougher.