A look at the exchange rate will be enough to explain: the dollar rate, which stood at TL 3.78 in late October, reached TL 3.94 as of the end of November — a 4.3 percent (16 kuruş) increase. The euro rose by 7.3 percent, or 32 kuruş, and hit TL 4.70 in the same period. These rises are the sharpest seen in the history of Turkey’s economy on a monthly basis. Yet, it even gets more drastic when one compares the level of the hike from end of September. The dollar, which stood at TL 3.55 as of end of September, rose by 11 percent over two months while the euro, which was at TL 4.20, rose by 12 percent over a two-month period. The soaring rate will more than likely take a major toll on the economy, especially on the interest and inflation rates.
CB too late to intervene
Political pressure on the Central Bank regarding the interest rate policy, mostly applied by the economic advisor to the president as well as other finance related ministers, has kept the Bank from taking measures in time to prevent the hike in the exchange rate. Some of the actions taken by the Central Bank belatedly are only working to take the heat off the exchange rate for the day. The reason behind this is two-fold: the rate hike expected by the markets from the Central Bank is taking too long to arrive and, at the same time, investor confidence is declining. The month of December certainly will see a crucial turn in terms of the financial fluctuations the markets have been seeing over the past two months. The “ship” will either receive a good deal of damage due to both domestic and international developments in December, or it will survive the stormy seas and sail on. This is because the first hearing in the trial of Azeri-Turkish businessman Reza Zarrab, who is accused by US authorities of having violated US sanctions on Iran through Turkish banks, will be heard in New York in December.
EU Finance Ministers’ decision also critical
In one word, there will either be complete havoc and markets will become more fragile in the long term, or the current pricing situation will remain in place. However, experts say that the rate is likely to continue its upward trend, most likely owing to diplomatic and political developments. The lira-settled auctions launched by the Central Bank have only had a partial effect on reducing these fluctuations. Another negative development that had an adverse affect on the lira was a discussion on whether the EU could include Turkey on a blacklist of tax havens. This potential development had would have had hugely adverse effect on trade ties with the EU as well as on transactions of Turkey’s financial segments abroad. The decision was expected to be made at a meeting of EU finance ministers on Dec 5, but officials announced later in November that Turkey will not be included on the list, relieving the pressure on the currency exchange rate a bit. The exchange rate has already caused significant damage to Turkish economy in terms of the inflation rate and the interest rate, and in this context, the outcome of the above mentioned developments will be crucial. Normally, it takes at least six months for the sharp rise in the rate from TL 3.55 to TL 3.94 just within two months to be manifest in the inflation figures, which means that the inflation rate, which the Central Bank is already struggling to keep down, might remain in double digits for a long time. This also entails that the borrowing interest rate, starting from house loans, will exceed 20 percent and remain above that mark for a long time.
