- Wealth PMS (50L+)
Before we start, here’s wishing you a very happy new year from the Capitalmind Team🌟💫✨
Turkish Lira is falling like a rock. It had lost -44% in the last year & down by -80% since 2015, against USD. The country’s inflation is rocketing. Official data suggests that inflation is around 20%. In reality, it can be even 40%. The buying power is going down drastically. What is happening in Turkey? Is it heading for hyperinflation? Let’s try to look into it.
How did it all begin?
Recep Erdogan, the current President of Turkey, was first elected in 2003. During the same time, Turkey’s economy started to go rapidly. By 2017, Turkey had become the 17th biggest economy in the world, with a GDP of $852 Billion (translating into 1.05% of the world’s GDP). Most of this growth was financed by external debt. At the end of 2017, the gross foreign-currency-denominated debt of Turkey stood at $453.2 Billion. That is around 53% of GDP.
However, things started to tumble in 2017. The United States of America, a close ally of Turkey, started to distance itself from Turkey. Tariffs were imposed on Steel & Aluminum imports. Amidst these geopolitical tensions, Lira started to fall against the Dollar. Inflation was inching higher. Turkey struggled to pay its foreign debt.
Economics 101 says that when a currency is devaluing & inflation is rising in the country, central banks usually raise the interest rates. This makes borrowing expensive & discourages spending. Less consumption will reduce demand for the assets, eventually bringing down inflation. Raising interest rates also increases demand for the currency, as it encourages people to save more.
However, Erdogan doesn’t agree with this theory. He believes that raising interest rates increases inflation. The reason for his unconventional belief is unknown. Since 2019, he sacked three central bank governors who tried to fix the problem. He just doesn’t want interest rates to go higher.
What lies ahead?
Erdogan is facing heat both domestically & internationally for his stubbornness in economic policies. Turkey is going for an election in June 2023. Unless he changes his stance, Lira may continue to slide further down till 2023, where there is some ray of hope for the people of Turkey.
Putting together the best conversations from our slack community
In this section, we bring you curated articles from across the internet that we found interesting. Today’s links are curated exclusively from our slack community:
That’s all, folks. Have a great first weekend of the year!
Everything we do at Capitalmind is grounded, in offering transparent and high-quality research, aimed at helping individuals make better investing decisions.
What you get