The story of Turkey and how it has managed to devalue a free floating currency

by Shaun Richards

It was only around 6 weeks ago that we last looked at the state of play in Turkey on October the 11th and because so much has changed let us remind ourselves of the position back then.

Across the world, one of the few central banks who are easing rates amid rising inflation is the CBRT. And after depreciating over 20% YtD, the Turkish lira is close to breaking $9.0 – and yet it has more downside. ( @macrocredit )

So we were worried about the Turkish Lira and at that point the interest-rates which were defending it had been cut from 19% to 18%, Let us now fast forward to this morning via the Financial Times.

The Turkish currency slid more than 5 per cent from Monday’s afternoon levels in New York to reach 12 against the US dollar for the first time. It is now down a fifth this month alone, the biggest such slide since the currency crisis three years ago.

I do sometimes tell the media off for use of the words “plunge” and collapse but this time around it applies and it has been as low or from the other side as high as 12.5. Looked at in economic terms free floating currencies are supposed to depreciate a sort of “slip-sliding away” as Paul Simon would put it. But the size and speed of this move makes it much more like a devaluation of the fixed rate currency era.

How did we get here?

The theme of a devaluation style move remains as we note this from the Financial Times.

Erdogan, a life-long opponent of high interest rates, used a speech on Monday night to declare that he was “pleased” the bank had cut rates for the third month in a row last week, despite warnings from economists it would stoke inflation that is already running at an annual rate of 20 per cent and further destabilise the currency.

I am not so sure about the “life-long opponent” but for our purposes the real issue is that he has established a policy in Turkey of lowering interest-rates due to his belief/claim that it will lower inflation. I mentioned the “Puppet Masters” in the Dune novels last night in the comments section and that theme applies here as he has been the Puppet Master controlling the central bank the CBRT. On that road interest-rates have been further cut to 16% but the view had developed that this might be it. Well last night’s speech created fears that more might be on the way leading to the currency taking a dive on such a scale that it is a devaluation.

At a time like this you need scapegoats and the list is familiar apart from global financial acrobats.

Painting a picture of a dark global conspiracy aimed at subjugating Turkey, the Turkish president said his nation would not give in to economists, opportunists and “global financial acrobats” calling for interest rate rises.

The next bit in the FT returns us to one of my themes from October 11th which was the J-Curve.

The government was prioritising growth, he said, to encourage investment, production, exports and unemployment. “That’s why we pay no attention to the clamour of the doomsayers,” he said. “With the help of God and the support of our people we will emerge victorious from this war of economic independence.”

Here was my explanation back then.

This should in these circumstances be the territory of the J-Curve.This is where trade initially gets worse because the terms of trade shift immediately but it takes a while for output and volumes to respond. Looking at the incessant declines in the Lira Turkey is seeing a succession of J-Curves.

My last sentence continues to apply as the Lira continues to fall. The theory that exports will strengthen is not so easy to measure because the terms of trade keep getting worse!

Trade Balance

When we looked at things on October the 11th the year to August in trade terms was positive with export growth a fair bit higher than imports. However September lost to some extent as a 37% increase faded to  this.

The overall export volume index compared to the corresponding month of the preceding year increased by 16.3% in September…….

The import numbers are much harder to interpret and let me explain. First the Erdogan way which will be to look at volumes.

In September, the overall import volume index compared to the corresponding month of the preceding year decreased by 9.2%.

At this point things look to be going rather well as exports rise and imports fall just like in a school textbook. But there is a catch as I highlighted earlier or what is called a reverse J-Curve.

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As compared with the corresponding month of the preceding year, the overall import unit value index increased by 23.4% in September.

Turkey has imported less but paid much more for it.

There is an addition factor which will be beginning to be in play which is higher energy prices. It will get worse at a rapid rate because this is the state of play according to the International Energy Agency.

Still, fossil fuels continue to drive Turkey’s economy, with a heavy dependency on imports, especially oil and gas (93% and 99%, respectively).

So the Turkish Lira would probably have been under pressure anyway but trying to pick that out from the plunge is nearly impossible.


Turkey is not as much of an outlier as it was as inflation has risen elsewhere.

A rise in general index was realized in CPI (2003=100) on the previous month by 2.39%, on December of the previous year by 15.75%, on same month of the previous year by 19.89% and on the twelve months moving averages basis by 17.09% in October 2021.

Rather curiously there is no breakdown of energy costs leading us to mote that perhaps these two gave us a guide to the rise in imported inflation.

On the other hand, clothing and footwear with 7.56%, alcoholic beverages and tobacco with 5.97%, and transportation with 2.43% were the main groups where high monthly increases realized. ( Monthly Rises)

Looking ahead we will see a sort of two-speed inflation. Goods and services which are imported will see rises and indeed sharp ones. This may not be always instant as some will be on contracts but as soon as a contract ends the price will be much higher. So either a succession of rises or fewer large ones. Then we have what I will call the “domestic economy” which at first is unchanged but will be impacted over time by the cost of any imports. So it too will then pick-up.

Or more simply.

The only way is up, baby
For you and me now
The only way is up, baby
For you and me now


The first thing to note is that the interest-rate or more specifically the rate of carry for holding the Turkish Lira was holding it up and maybe about the only thing that was. Or if you prefer it was what has been called “hot money” trying to pick up the carry and avoid any capital falls. Traditionally this is a Japanese game ( the stereotype is Mrs.Watanabe) and as so often it is a disaster.However care is needed because the Japanese sometime just sit in there for the long-term.

Next let me look at the issue of all the foreign currency debt which Turkey has.

Turkey’s gross external debt stock reached $446.4 billion as of end-June, the country’s Treasury and Finance Ministry revealed Thursday.

The June reading was 58.3% of Turkey’s gross domestic product (GDP), the ministry said in a statement.

The country’s net foreign debt amounted to $242.4 billion as of June 30, some 31.7% of its GDP. (

Some of that must seem like a mountain right now to those who borrowed it. This is another form of the carry trade so you are paying less interest but so far the Lira that most repay in has fallen even further. Some lucky ones will have foreign business in that currency.

Meanwhile BBVA of Spain piled in last week.

BBVA outlined its 2022-2024 plans just a few days after it offered to buy the rest of Garanti (GARAN.IS) for up to 2.25 billion euros ($2.6 billion), taking advantage of a slide in the Turkish lira. ( Reuters 18th November)

If they hedged it then they may have stopped the Lira falling even further. It is roughly a quarter of the price they paid for their existing stake back in 2010.

That raises the issue of Spanish exposure to Turkey. In fact all exposures because the Turkish authorities have US Dollars but they borrowed much of them.  How is that going?


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