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23 Mar 2021

International Economy

Turkey’s Lira Crisis: Waning investor confidence amid troubled economy and compromised independence of Turkish central bank (Business Brief No.3916)


​Turkey's lira encountered a massive selloff when the Asian stock market opened on Monday (March 22, 2021). The lira depreciated beyond 8.0000, hitting its lowest level in four months at 8.4706 lira per dollar, or an estimated drop of 15 percent from the closing price on Friday (March 19). This plunge was in response to President Recep Tayyip Erdogan's sacking of Mr. Naci Agbal, Turkey's latest central bank governor, on Saturday (March 20). Since July 2019, three Turkish central bank governors have been removed from office before the completion of their term.

Turkey is an emerging market that has experienced severe economic turmoil and a currency crisis (Turkish Lira) over the past 3-4 years. Investor confidence towards the government's implementation of economic policies has been on the decline amid signs of government intervention in the Central Bank of the Republic of Turkey (CBRT)'s monetary policy. While President Erdogan has been outspoken in calling for the CBRT to reduce interest rates, Governor Naci Agbal had consistently enforced strict control over the country's monetary policy, increasing its main policy interest rate by a total of 8.75 percent over his tenure of less than five months at the CBRT. In its latest meeting on March 18, 2021, the CBRT raised the policy rate by a further 2.00 percent to 19.00 percent, in an attempt to counter rising inflation and keep potential risks from capital flight at bay.  

KResearch is of the opinion that Turkey's recent lira crisis stems from complicated issues, especially fundamental weakness in the Turkish economy which cannot be resolved within a short span of time – especially in light of the slow global economic recovery due to the COVID-19 pandemic. As a result, the lira will tend to face even more pressure in the near future which may ultimately affect other emerging market currencies with fragile economic fundamentals, including some Asian currencies. While the Baht's value may have weakened as of late, any effects are still rather limited. Thailand's external stability also differs from that of Turkey, as Thailand has stronger fundamentals together with a high level of foreign exchange reserves.

International Economy