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25 Mar 2021

Econ Digest

Lira depreciation crisis... stems from complicated issues

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        Turkey's lira encountered a massive sell-off after the Asian stock market opened on Monday, March 22, 2021. The lira weakened to a four-month low against the U.S. dollar at 8.4706 lira per dollar, down by about 15% from the closing price on Friday, March 19. This plunge was a response to President Recep Tayyip Erdogan's sacking of Mr. Naci Agbal, Turkey's 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 terms.

        Turkey is an emerging market that has experienced economic turmoil and a currency crisis over the past 3-4 years. Investor confidence towards the government's implementation of economic policies is waning amid signs of government intervention in the Central Bank of the Republic of Turkey (CBRT)'s monetary policy. While President Erdogan has repeatedly called on the CBRT to reduce interest rates, in less than five months of Governor Naci Agbal’s tenure, the Turkish central bank has gradually tightened its monetary policy, with a cumulative rate hike of 8.75%. In its latest meeting on March 18, 2021, the CBRT raised the policy rate by a further 2.00% to 19.00% to curb inflationary pressures and control the potential risks of capital outflows.

        KResearch is of the view that this round of the ongoing Turkish lira crisis is complicated by the fact that the fundamental weakness in the Turkish economy cannot be resolved within a short span of time. In particular, with the global economy not yet recovered from the COVID-19 pandemic, the Turkish lira could face even more pressure in the near future, potentially putting pressure on other emerging market currencies with fragile economic fundamentals, including some Asian currencies. While the Baht's value may fluctuate within a weaker range, the impact is not significant. Thailand's external stability also differs from that of Turkey, as Thailand has a stable fiscal position together with high foreign exchange reserves.

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