General

After Turkish President Erdogan declared that the ambassadors of the 10 Western countries were "unpopular", the lira was sold on a large scale, and the expulsion or recall of ambassadors between countries was very serious, which meant "breaking diplomatic relations."

On October 25, following the sharp drop last week, the decline in the Turkish lira against the US dollar expanded to 2%, a record low. Investors are currently paying close attention to whether the Turkish Ministry of Foreign Affairs will officially announce Erdogan’s decision last Saturday.

Since the beginning of this year, the Turkish lira has fallen by nearly 25% against the U.S. dollar, making it the worst-performing currency in emerging markets.

Diplomatic Disturbance

According to local media reports, Erdogan told supporters when attending an event in northeastern Turkey on the 23rd that he had given "necessary instructions" to the foreign minister and listed 10 Western ambassadors to Turkey as "unwelcome people." . He also said that day: "These ambassadors need to understand, understand and know Turkey. As long as they don't understand or understand Turkey, they must leave."

The fuse that threatened to expel diplomats from 10 countries was their demand for the release of Kavala, a Turkish businessman who was detained.

Kavala, 64, is a well-known human rights advocate and political dissident. Kavala was accused of participating in organizing anti-government demonstrations in 2013 and an attempted coup in 2016, and was detained after 2017.

Kavala was acquitted last year, but the verdict was overturned this year, and his trial is currently in progress.

On October 18, local time, the embassies of the United States, Canada, Denmark, Finland, Germany, France, the Netherlands, New Zealand, Norway, and Sweden in Turkey issued a joint statement criticizing Kavala’s trial for “continuous delays” and “to give justice to Turkey”. The system’s respect for democracy, the rule of law, and transparency is overshadowed." The statement called for a "fair and prompt" trial of Kavala's case and an "emergency release" for him.

According to the French news channel france24, analysts believe that Erdogan’s latest actions may create the deepest and most lasting rift with Western countries so far. This may also cast a shadow over the G20 meeting held in Rome this weekend, where Erdogan originally hoped to discuss the purchase of a large number of American fighter jets with US President Biden.

However, Reuters believes that looking back at the previous disputes between Turkey and European and American countries, Erdogan may not have follow-up substantive actions. In 2018, the United States announced that because the American pastor Brunson was imprisoned by Turkey, the United States decided to sanction the Turkish Attorney General and the Minister of Interior. Subsequently, the United States announced that it would double the import tariffs on Turkish steel and aluminum products. At that time, Erdogan had threatened that Turkey would boycott electronic products produced by the United States, but in fact, the sales of the goods were not affected. Last year, Erdogan called on the Turks to boycott French goods in response to Macron's "anti-Islamic policy", but the result was nothing.

Lira depreciates sharply

Erdogan’s latest remarks disturbed investors as the Turkish lira’s exchange rate against the US dollar fell to a record low. In fact, since Erdogan won the 2018 election, the lira has depreciated 50% against the U.S. dollar.

In the past two and a half years, he fired three central bank governors due to policy differences, which severely damaged the credibility and predictability of the Turkish central bank’s monetary policy. Worried about the independence of the central bank, foreign investors have continued to sell Turkish assets in recent years. .

Two weeks ago, Erdogan fired three members of the Central Bank’s Monetary Policy Committee (MPC) and appointed two new members to replace them.

At present, Turkey's inflation rate is as high as 20%. Erdogan believes that interest rate hikes will lead to inflation, and he firmly believes that interest rate cuts can reduce inflation.

On September 23, the Central Bank of Turkey announced a 1% reduction in the policy interest rate. Recently, the Central Bank of Turkey announced again that it would lower the policy interest rate from 18% to 16%. After the interest rate cut, the exchange rate of the lira against the U.S. dollar plummeted.

Analysts pointed out that according to economic principles, usually under the circumstances of high inflation and low foreign exchange reserves, interest rates should be raised to attract foreign investment, thus making the country's currency strong.

Piotr Matys, a senior currency analyst at InTouch Capital, believes that the central bank of Turkey’s interest rate cut has sent a strong signal to the outside world that “the central bank intends to ease monetary policy regardless of the negative consequences of the sharp fall in the value of the lira”.

The depreciation of the Turkish lira has also put continuous pressure on the Turkish economy. Local media reports pointed out that although the total economic volume of Turkey is growing nominally every year, the growth rate cannot keep up with the depreciation of the lira. It is expected that the country's GDP will fall out of the top 20 in the world this year.

Emre Peker, the European business director of the consulting firm Eurasia Group, said that when the economy is facing "great challenges", he threatened to expel the ambassador. gamble".

Erdogan has been in charge of Turkey for nearly 20 years, but the support rate for the ruling coalition he leads has fallen sharply. According to Reuters, the six opposition parties in Turkey are strengthening cooperation to defeat Erdogan and his Justice and Development Party in the general election before 2023.

According to Nick Stadtmiller of Medley Global Advisors, the Turkish lira may continue to fall to more than 10 liras per dollar this year, and the rate of depreciation will be slower than before, because the depreciation mainly comes from Turkish domestic capital flows. Lira assets held by foreign countries are already very low, and there is not much room for foreign capital to further flow out of the Turkish market.

Although the currency continued to be under pressure, the Turkish economy recovered quickly during the epidemic. Turkey's gross domestic product (GDP) in 2020 has increased by 1.8% compared to 2019, and it is one of the few countries in the G20 that has achieved positive economic growth.

However, as the currency continues to depreciate, I would like to remind all foreign traders to pay attention to the risk of collection and beware of abandoning the goods at the destination port of the customer!