Turkey Is Caught In A Currency Quagmire

Recep Tayyip Erdogan, President of Turkey


11/8/2018/ARM Research   

Over the past few months, Turkey’s economy has been laced with tapestry of macroeconomic woes. Despite strong Q1 GDP performance of 7.4% YoY (Q4 17: 7.3% YoY), the stark depreciation in Turkish Lira has negatively impacted different spheres of the Turkish economy. 

To buttress, being a net importer of crude oil, Turkey currently grapples with high cost of petroleum product following rising crude oil prices (+25% over H1 18 to $71.2/bbl.) with knock on effect driving current account deficit higher (+2% QoQ to $16.1 billion in Q2 18).  

This in addition to interest rates normalization in the US drove massive repatriation of funds out of Turkey.  

Furthermore, the perceived lack of independence of Turkey’s Central bank following President Erdogan’s incessant interference with monetary policy decisions further exacerbated FPI exit from Turkey, leaving the country in dearth of US dollars with pass through inciting stark depreciation in the Lira (-60% YTD to 6.07 Lira/USD).  

While these stoked a hard landing for corporates highly levered with the greenback, the marked depreciation in the Lira also pushed inflation to a five year high of 15.85%.  

To our minds, given the recent move by the US president to double tariff on steel and aluminium to 50% and 20% respectively, Turkey’s economy is on the verge of journeying through a quagmire over the near term.

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