2021 was a banner year for many emerging markets.
The global economy has adapted better after some of the lockdowns have been consigned to the history books and global growth is setting the pace.
Actually, this has proven to be an excellent environment for countries like Turkey, which have been waiting for a leap forward for many years, however the Turkish lira has just collapsed once again. What does this mean? A lot of things have gone wrong.
Even if the signs of the global economy are pointing to growth, weaker countries get out of step if they go too far out on a limb. In concrete terms, this can mean that they incur too much debt or pursue a fiscal policy that is too risky.
The price is then paid by the citizens as the currency is punished and devalued and it becomes more expensive for the country to capitalize on the market. In the largest countries of the world, this is all closely regulated and there is also international coordination. In emerging markets, it's sometimes different.
The Turkish lira has fallen by a staggering 20% in recent weeks. Why? Because the government has encouraged new interest rate cuts by the national bank. Central bankers who have been reluctant to adopt such a monetary policy in the past have been mercilessly replaced and replaced by new candidates.
The crazy thing is that Turkey's economic fundamentals are excellent. However, President Recep Tayyip Erdogan's push for interest rate cuts has put the lira under pressure completely unnecessarily. It is all about finally being popular with all the people.
Already in 2019, the lira weakened sharply after Erdogan fired the then central bank governor Murat Cetinkaya. Erdogan repeated the same procedure again in early 2021 and promptly the lira depreciated by 15% in just one day. It has not recovered from this to this day. On the contrary.
Due to the current interest rate cut, the lira went through the floor again and lost considerable value. Erdogan continues to stubbornly follow through with his course, which continues to put pressure on the lira.
Investor confidence has been very severely disappointed and it is only a matter of time before they turn away from Turkey even more because the risk is simply too great.
On the other hand, we see continued strength in the U.S. dollar, especially when compared to the euro or the British pound. That makes it even harder for the lira to regain ground. Servicing foreign loans with Turkish lira has thus become much more expensive.
The biggest risk is the politics and rigidity of the leadership. Without an opportunity for real change, hardly any investors will invest in Turkey. Even its own residents prefer to invest their money abroad in U.S. dollars.
Trading the Turkish lira is interesting because of the still high interest rate in the country and the sustained volatility in the currency. However, everyone must also be aware that this opportunity comes with risks.