NEWSAug 24, 2018

Lira Exchange Rate Plummeted, Turkish Currency Crisis Broke Out

The sharp depreciation of the Turkish lira has led to soaring prices, which have had a major impact on the daily lives of the Turkish people.

Affected by the US new trade sanctions against Turkey, the Turkish lira fell sharply against the US dollar by nearly 20% on August 10. It continued to plunge after the opening on the 13th, a decline of about 10%. As of August 13, the lira against the US dollar had the cumulative decline rate of about 50% this year. Although the US government has doubled the import tariffs on Turkish steel and aluminum products, causing a huge shock in the Turkish financial market, the Turkish side said it will never give in and resolutely counterattack. On August 15, the official Turkish announcement announced that it would double the import tariffs on US passenger cars, alcohol and tobacco products in response to US trade sanctions.

Although the Turkish counterattack made the lira short-term support, once rose more than 6%, but with the outbreak of the US-Turkish dispute and the sharp depreciation of the Turkish lira, Turkey's inflation has been out of control. The well-known financial website CNBC issued a statement saying that the Turkish currency crisis is intensifying due to the annual inflation rate soaring. According to industry estimates, Turkey's inflation rate has exceeded 100%. Turkey’s economic fundamentals are weak. If the United States intensifies sanctions against Turkey, it will lead to further deterioration of Turkish inflation and collapse the financial market. Turkey may face an ending like Venezuela. Venezuela was once the richest country in Latin America, it is precisely because its inflation is out of control (expected to soar to 1000000% by the end of 2018) that led Venezuela to a full-blown economic crisis. So although Turkey is currently the world's 17th largest economy, its inflation exceeded 100% is seen by the market as the beginning of hyperinflation, which is undoubtedly a disastrous signal for Turkey.

The Lira’s plunge led to a currency crisis in Turkey, and the US’s increase in import tariffs was only a trigger. The deepest reason is that Turkey itself has high inflation, high external debt, a decline in the balance of foreign reserves, and a dilemma between fiscal and monetary policies. According to relevant data, Turkey is one of the countries with the most serious deficits in the world. In 2017, its external debt ratio ranked first among emerging countries, reaching 53.4%. Besides, the balance of the Turkish foreign reserve is too low. It was only $82.7 billion in May 2018, and it was simply unable to fight the currency crisis. Moreover, Turkey's domestic inflation rate is above 15%, making it difficult to implement a proactive fiscal and monetary policy, which has caused the Turkish economy to continue to slump. Some economists have pointed out that the currency crisis in Turkey will happen sooner or later without the pressure from the US government.

This Turkish “storm” has touched the nerves of the global market, and all walks of life have closely watched the trend of this crisis. The Turkish Consul General in Shanghai, An Tong, said that although there are some problems in the Turkish economy, the sharp depreciation of the lira is mainly a political issue, and Turkey still has hope to withdraw from the crisis. One of the reasons is that the US's trade sanctions on a global scale have triggered opposition from many countries. European countries such as Germany, Italy, Britain, and Russia have already taken actions against the United States. In addition, in the past six years, both Germany and other European countries have made huge investments in Turkey, and they will not easily give up the Turkish market. An Tong pointed out that based on the interdependence between Turkey and the global market and the level of activity in the private investment sector, the situation of large fluctuations of the lira will not be continuous and will change in the short term.

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