Following Venezuela and Argentina, Turkey has lost control over its national currency in the last decade as well. Although the officially announced inflation rate is less than 18% in Turkey, there is a hidden high inflation rate, along with the increasing unemployment rate. The country’s current total unemployment rate is almost 20%, and its economy is facing a deep financial and economic crisis, recently worsened by the COVID-19 pandemic. Investors and traders are thus facing high levels of fluctuating exchange rates. But in order to manage this risk, we must first understand how this crisis originated.
To understand the financial crisis in Turkey, it is important to observe the Turkish president's economic policies and economy-related decisions. One of the main reasons behind the currency’s weakness has been the country’s unconventional monetary and fiscal policy moves. In July 2019, President Recep Tayyip Erdogan dismissed former governor Murat Cetinkaya over a disagreement regarding high-interest rates, causing an aggressive easing cycle. Moreover, Turkey’s corporate debt has caused an FX financing gap of over $200 billionas well, which is a quarter of the country’s GDP.
The decreased independence of the Central Bank of the Republic of Turkey (TCMB) has not helped the situation either. According to the Council on Foreign Relations (CFR)’s Brad W. Setser, “the banks are the main reason why Turkey's currency crisis could morph into a funding crisis, one that leaves Turkey without sufficient reserves to avoid a major default.” This comes hand in hand with the sacking of Cetinkaya, with Ibrahim Turhan, a former deputy central bank governor, stating, "removing the central bank's governor in this manner will deal a big blow to its institutional structure, capacity, and independence.”
In order for Turkey to successfully overcome this crisis, its economy and citizens must make rational decisions in the next election. Making long-term investments is also ideal since the political party governing the country has lost power, and a new political setting might likely come true soon. However, making short-term investments, especially financial ones to receive gains from stock exchange markets, may not be a rational option for investors. Turkey's general elections are scheduled to be held in 2023, which means the Turkish economy may finally turn into a national economy with high profitability for investors.
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