Anticipation still prevails in the exchange market in Turkey, despite the sudden improvement of the lira against foreign currencies, which occurred yesterday evening, Monday, and extended today, Tuesday. However, there are fluctuations in prices that reflect not a few speculations.
The behavior of individuals during the lira crisis can be described as coming in the so-called herd behavior. The trend towards buying the dollar and getting rid of savings in the local currency raised the severity of the crisis. It helped convert most transactions in the Turkish market to the dollar. The trend towards selling the dollar since yesterday evening comes within the framework of The herd acted, as it announced the sale of about one billion dollars, following the speech of Turkish President Recep Tayyip Erdogan, in which he announced the new mechanism that would ensure that exchange rate fluctuations would not harm everyone.
Through coordination between the Central Bank of Turkey and the Association of Turkish Banks, an agreement led by the Turkish government was concluded that guarantees companies and exporters that they will not be exposed to exchange rate fluctuations in return for transferring their dollar returns.
Before the announcement of this agreement, which Turkish President Recep Tayyip Erdogan talked about, the dollar exchange rate had exceeded the 18 lira barrier. It was a frightening matter, and some people expected that the government would aim for the dollar exchange rate to reach 20 lire, a stimulus for Turkish exports. However, this is just speculation from some, not an announced trend from the government.
But as soon as President Erdogan announced the new financial mechanism - which guarantees exporters compensation for their balances transferred from the dollar to the lira if the value of the lira depreciates, as well as the companies - he found that the lira improved in a few moments. First, the dollar exchange rate became 15 lire, then 14, until it reached 12 lire.
Without entering into a historical digression, however, the price of the dollar in 2013 was around 1.9 lira, and the lira continued to decline against the dollar from that date until January 2021, bringing the dollar to 7.36 lira, according to the statistical data of the Central Bank of Turkey.
Concerns about the lira crisis began at the end of June 2021, as the lira began to decline against the dollar, bringing the dollar exchange rate to more than 8 lire, and then the index of lack of reassurance in October and November 2021, as the dollar price exceeded the barrier 12 lire. Finally, the days of December 2021 pushed open scenarios for the devaluation of the Turkish lira, which raised the fears of all participants in economic activity in Turkey, including investors, savers, and consumers.
The decisions regarding the interest rate cut and the successive comments by President Erdogan emphasizing the continuation of the interest rate cut to support investment and employment pushed the lira to decline at accelerated rates.
In such an environment, speculation on the exchange rate turns from an activity for professionals to an activity for everyone who has savings in the local currency, which is the reality that the Turkish economy experienced from July to December 20, 2021. However, the matter did not s; Inflation, which exceeded 21%, reared its head due to the lack of monetary policy control.
The economic problems the Turkish economy is going through are uneven, and it has been possible to coexist with them and overcome them. The interest rate fluctuation and the high inflation rate have been controlled more than once. With the chronic Turkish economic crisis related to importing most of the country's energy needs, Turkey announced during the years 2020 and 2021 about gas and oil discoveries that will enable it to perform even better in 2023 as these discoveries go into production.
But on the other hand, the political factors were influential, especially after 2013, when Turkey adopted a moral position to stand next to the revolutions of the Arab Spring and to confront projects to demolish these revolutions, as well as confront the Kurdish state project on its borders in both Iraq and Syria.
The country also experienced a failed experience of a military coup in 2016. After that, a state of escalation began in other regional files in the Gulf crisis, then the Turkish military presence in Libya and Somalia, and also the announced clash with America over the S-400 defense system, As well as supporting Azerbaijan militarily in its war with Armenia, which created a new clash for Turkey with the European Union, and finally the conflict related to gas fields in the eastern Mediterranean.
On the domestic front, the opposition has always been keen to call for early elections at the presidential and parliamentary levels and to focus on the unnecessary major projects adopted by President Erdogan and his parties, such as the Istanbul Canal, the new airport, bridges, and other projects.
All of this helped the devaluation of the lira. However, the Turkish economy during this period did not stop achieving acceptable favorable rates in the gross domestic product, as well as a steady increase in commodity and service exports, which led to a wide reading by experts that the lira crisis is a political degree. The first is that economic factors are supposed to lead to an improvement in its exchange rate, not a decline.
Speculators are always ready to seize opportunities in different areas, such as real estate, stock exchanges, oil and gold markets, and currencies. They are always ready to go through various experiences, especially if crises have multiple aspects. There is a state of confusion in managing the crisis, as was the case in The situation of the Turkish Central Bank and the Turkish government in general, where the process of coordination between the components of the economic policy "financial, monetary, trade, investment, and employment" was absent, leaving the Turkish Central Bank to lead the economic policy without coordination with the rest of the other components.
Speculation and the role of speculators in the Turkish currency did not need evidence, as prices were falling every hour when announcing the high rate of Turkish currency growth.
The GDP in the third quarter of 2021 was 7.4%, and banks, companies, and individuals carried out speculative operations.
In May 2020, the Turkish government suspended three foreign banks from dealing in the Turkish market and required them to fulfill their obligations to local banks. These banks included BNP Paribas SA and Citibank NA ( Citibank NA) and UBS AG, which is located outside Turkey and operated from Britain, which led to it being accused by the Turkish government of working to weaken the local currency.
There are accusations by some of the suspicious role of Turkey's political opponents from regional countries that contributed to pumping money through illegal channels, speculating in the exchange rate market, destabilizing the Turkish street, and paving the way for widespread anger that led to the failure to vote for President Erdogan and his party in the July elections. 2023.
Among the most critical goals that the Turkish government is keen to highlight for its adoption of the interest rate cut policy:
The Turkish economy is mainly dependent on the production of goods and services.
Speculation on the exchange rate and raising the interest rate lead to a decline in productive economic activities.
The transformation of the Turkish economy into a rentier economy was affected by various factors related to regional and international fluctuations.
More than once, the Turkish President's speech was characterized by defiance and his and his government's ability to overcome the problems of high Inflation and speculation on the exchange rate, as well as a fondness for the successes of the past.
In light of the state of affairs since Monday evening, the lira crisis can be considered just a problem, and it will take some time. Still, it will not turn into a financial and economic crisis, provided that the Turkish government succeeds in implementing a comprehensive reform package, with controls placed on speculation and not only natural procedures. There is an urgent need for exceptional measures to prevent currency speculation in the Turkish market.
Where are the lira prices headed in the short and medium term?
Despite the apparent improvement in the lira's exchange rate towards foreign currencies, it is now difficult to predict the future in the short and medium terms until the mechanisms of the new financial system announced by the government become clear.
On the other hand, addressing the Turkish lira crisis requires a package of measures. Suppose the measures announced yesterday evening have helped restore confidence to a not-small segment of dealers in the Turkish exchange market. In that case, it remains for the government to assign these measures with tools and other means that lead To achieving its objectives of finding an exchange rate and an interest rate that suit the requirements of the progress of the Turkish economy.
Over the past six months, the Turkish economy has paid a price not insignificant as a result of adopting the interest rate cut. However, this policy has its face on the economic front because it reduces production costs, helps producers and investors to expand their activities, and pays savings for work and investment away from hoarding or depositing in banks; speculators had another role, which led to high inflation and depreciation of the local currency.
But the measures taken by Erdogan and his government on Monday evening improved the lira exchange rate by about 30%.
It can be judged on the achievement of Erdogan's policy towards lowering the interest rate during the coming period. , No failure of this policy.
Determining the winners needs to specify the period we are talking about. For example, over the period from June 2021 to December 20, 2021, the winners were:
Speculators (in all their categories, banks, companies, individuals) in the first place.
Then the debtors pay what they owe in local currencies.
As well as those who had balances of their savings in foreign currencies.
The exporters also benefited from the increase in their exports and dollar revenues.
After the evening of December 20, 2021, the situation is different, as things are expected to return to normal, and for the economy to perform its various roles without undue pressure. Hence, their deposits and savings, and they can plan their short- and medium-term activities.
In light of the lira crisis:
Savers were hurt as the inflation rate exceeded the interest rates announced by the banking system.
The importers were also affected, whose cost of imports increased by procuring foreign currencies from the local market at inflated prices.
The government was also affected by the burden of social protection.
As well as creditors who have dues in the local currency, as their dues have weak purchasing power.