Everyone has been confused since Friday last week. There were serious delays in the money-loan and payment mechanisms on Monday morning. Nobody knew exactly what to do. The explanations from the Banking Regulation and Supervision Agency did not show exactly how to implement this new practice.
Meanwhile, the foreign currency sales, which were probably made by the government, caused the exchange rates to go down in the early hours of the morning, then they assumed their previous level during the day. Those who import raw materials and export goods were uneasy about experiencing a nightmare similar to the one they had in December last year. Obviously, importing at an expensive rate and exporting at a low rate is not something that can be tolerated, especially now when profits are very low.
Russia’s default was at the top of the world agenda. This news, and the fact that Turkey’s CDS premiums are still around 800 show that conditions have not much changed since Friday. The loose course of exchange rates creates a buying opportunity for those whose money is placed in FX-rate hedged deposit accounts. I think this situation is also known by the administration. A new regulation might soon be introduced to deal with it.
“The Essence of the Matter Is…”
- There is a need for foreign funds due to the lack of private savings in Turkey. For this reason, the stability of the exchange rates and the depreciation of the Turkish Lira at least as much as inflation became musts.
- Nearly 90% of imports consist of goods and energy required to keep the production going on. The goods or services we use in business, home and social life are also indexed to foreign currency. Therefore, we need a stable foreign currency inflow.
- The accumulation of savings needs to be ensured so as to generate funds for growth and development at reasonable costs. People’s confidence in TRY can only be restored through the appreciation of national currency assets or expectation that they will appreciate. As lira gains in value, the tendency to hold foreign currency as a precaution will decrease and exporters can use the foreign currency they earn in the country without any worries. All these would also help increase the reserves.
- Investors’ hesitations about “confidence” will continue, the intended capacity increase will not be achieved, economic growth will become unstable, inflation will remain high, TRY will fluctuate and continue to depreciate unless structural reforms are implemented as soon as possible.
- Steps must be taken to improve justice, individual freedoms, education, diplomacy, and other issues. These steps are also necessary to calm the markets and the increase the confidence in national currency. Only then, the government can say to people, “There is no need to use foreign currency from now on”. But saying that now, without doing the things that must be done first, creates an erosion of trust.
To sum up: It would be a short-sighted attitude and a big mistake to expect exchange rates, prices, and interest rates to go down by focusing on the economy alone.