Why Turkish Lira weakening against USD August 2013

Following the United States announcing a possible military intervention in Syria, the Turkish Lira weakened (devaluation of one currency against another) to beyond 2 to the dollar on Tuesday 27 August – leading to some to worry about nations surrounding Syria as the turmoil in the country begins to take its toll on neighbouring economies. 

US Secretary of State, John Kerry, said in reaction to the suspected gas attacks in Syria that he “believes there must be accountability for those who would use the world’s most heinous weapons against the world’s most vulnerable people” – such strong words immediately caused a wave across neighbouring economies of Syria. But is this the only reason why the Turkish Lira has seen a devaluation in recent times?

Why has the Turkish Lira devalued?

There are several reasons that have seen the Turkish Lira weaken in recent times.

1.      The fact is, Turkey is a neighbouring country to Syria – this is bound to have a negative effect in the short term on the region. The struggles going on within Syria have a knock-on effect to countries in the region. The current unstable situation is causing markets to worry about possible military intervention in Syria by the US and Western forces. Following the US announcement, Israel’s TA 100 index saw a 1.6 percent fall, while markets in Abu Dhabi, Kuwait, and Saudi Arabia reported losses of over 3 percent.

2.      However, this is not the only cause for the blip in Turkey’s Lira. The Lira has fallen by a total of 8 percent since May 2013 following the US Federal Reserve’s announcement on May 22 that it would begin scaling down bond purchases this year.  US Federal Reserve’s move impacted not only Turkey but many other emerging power-house economies too including Brazil, India and others, which have seen their currencies devalue against USD.  Indian currency has lost almost 20% for example, Turkish Lira has done much better relatively speaking.  This, coupled with Turkey’s tightening of monetary conditions aimed to reduce the selling pressure has created a second wave of selling tendency because of the uncertainties that come with it.  Basically, the Lira will remain under slight pressure until the Central Bank changes to a more orthodox policy that will soon see the Lira pick up and become highly attractive again – the words of Fatih Keresteci, a strategist at HSBC Bank in Turkey. 

3.      And possibly to a lesser extent, the harsh demonstrations which started with the Gezi Park, Istanbul events in May and spread to other major cities in Turkey did not help the Lira.  Public opinion and confidence for the current Erdogan government does not seem to be as strong now as it was prior to Gezi Park events. With the Turkish local election coming up in early 2014, which are seen as indicative as major parties share of the electoral vote, it can be argued that there is a an element of political uncertainty as to who will be the main power brokers in the country in the years to come. Having enjoyed a very long period of single party confidence and domination, this uncertainty seems unexpected, hence arguably has had an impact on the Turkish Lira.  

Do I need to worry about the Turkish economy long term?

The short answer to this question is no. Turkey is a growing country with recent economy growth rates being second only to China in recent years. Most investment experts and Turkey themselves expect a pick-up before the end of the year. Turkish Central Bank governor, Erdem Basci, saying after the announcement: “Don’t be surprised if the Dollar hits TL1.92 or lower by the end of the year”.

Is it still safe to invest in Turkey?

There are a number of factors that suggest that Turkey is a safe nation to invest in, safer according to many analysts than Greece, Spain and even Italy.  It is expected that once the Syria conflict calms down, the whole region in general will stabilise and we could see a sustained period of growth, not only in Turkey, but in neighbouring countries too.

Also, with Turkish Prime Minister, Recep Tayyip Erdogan, facing an election in 2015, you can surely expect the Turkish government to pull out all the stops to alleviate market worries and kick start the nations growth once again – it would be political suicide for the Turkish government not to take any action, so we suspect that this blip will soon be a thing of the past as Turkey moves onto pastures new and the current government looks towards another term in office leading the Turkish economy into an even more profitable future.