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Turkish Lira Is Falling Like a Rock

Investors and economists fear Turkey’s embattled economy could get worse before it gets better

The Turkish lira has shed nearly half of its value against the dollar this year and inflation is spiraling skyward. For Turkey’s embattled economy, investors and economists fear it could get a lot worse before it gets better. 

At the center of Turkey’s troubles are years of unorthodox economic policies championed by Turkish President Recep Tayyip Erdogan. Mr. Erdogan argues that higher interest rates stoke inflation and lower rates will cause inflation to ebb. This is the opposite of what economies around the world have experienced through history. 

It also goes against what most other emerging market central banks have done this year. Places such as Russia, Mexico and Brazil have lifted rates to fight inflation and stave off a stronger dollar, which makes foreign-currency debts harder to pay off. 

Mr. Erdogan has fired nearly every economic official who had stood in the way of his views. There is little sign that he will change his mind. 

“We don’t see policy makers looking to reverse course, trying to get investors back on board,” said William Jackson, chief emerging markets economist at Capital Economics. 

The rate slashing policy has torpedoed the lira, which is by far one of the worst investments in the world this year. When interest rates are lower than the rate of inflation, businesses, consumers and foreign investors worry that the purchasing power of the currency will erode.  A rapidly weakening currency can create an inflationary spiral because it pushes up the cost of key imports such as food and energy. 

Government statistics show that Turkish inflation surged to 21.3% in November from the year before, 6 percentage points above the central bank’s policy rate. But economists doubt the accuracy of the figures. An independent inflation research group ENAGrup, which assesses thousands of Turkish prices, estimates that annual inflation for November was more than 58%.

“Nobody knows what is happening between collecting the data and presenting the data,” said Veysel Ulusoy, an economist and head of the inflation research group. “The data do not represent the feeling in the society.

When the lira came under pressure in 2020, Turkey’s central bank managed the currency’s decline by borrowing foreign currencies from domestic banks and other entities and selling that money into the market to buy lira. 

This depleted the foreign currency that Turkey has in its coffers, with the central bank estimated to have more liabilities than assets. The central bank’s reduced firepower has meant that the lira has fallen faster and steeper than previous routs. 

A weak link, some worry, is Turkey’s banking sector. As of September, it had about $83 billion of external debt coming due in the next 12 months, according to data from Turkey’s central bank.

Historically, banks have been able to roll over those loans with foreign creditors, meaning they don’t have to tap their own foreign currency reserves. Economists say they will be paying attention to whether lenders allow the banks to roll over the next big batch of loans coming due in spring.

Another key worry for the banks: Locals are fleeing the lira. Nearly 60% of banking deposits are now in foreign currencies, according to data from Capital Economics. A sudden surge in requests among Turkish residents to withdraw dollars could force banks to draw down their foreign currency reserves or for the government to impose capital controls that limit what people can remove.

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