D.he Turkish finance minister, President Erdogan’s son-in-law Berat Albayrak, has just presented new optimistic growth forecasts, but the Turkish lira has lost value. Sören Hettler is not surprised. The foreign exchange specialist at DZ Bank has been following the crash on rates of the Turkish national currency for some time. Now he has analyzed it more closely. The result: non-economic, political factors are responsible for the decline of the lira. In the past twelve months alone it has lost more than a third of its value against the dollar and almost half of its value against the euro.
Until a few years ago, the lira appeared to be a paragon of stability. But since 2016, the attempted coup in Turkey and the subsequent conversion of the country to an autocratic presidential democracy, that has changed radically. The forced stability in the country with the submission of the institutions to the will of the presidential palace was followed by a serious weakening of the currency.
Hettler’s evidence does not work on historical reference dates, but he uses other emerging countries for comparison. It could be that their currencies would have performed similarly miserably. But they don’t, as he shows with the example of South Africa and its local currency, the Rand. For ten years the lira and the rand had developed in parallel against the dollar. Not much has been left of it since late 2016. Since then, the rand has lost around a fifth of its value, but measured against more than 60 percent that the lira has devalued, that is “still a pleasantly stable development”.
Economic growth and the corona crisis do not help with the interpretation. In both respects Turkey does better than the country at the Cape of Good Hope. This leaves only two major influencing factors, writes Hettler: “The reliability and stability of the political situation and the reputation of the central banks.”
In South Africa, too, there is a lack of political stability and zeal for reform, there is too much mismanagement and corruption. However, the country not only has democracy, freedom of the press and an independent judiciary, but “any attempt to curtail the central bank’s monetary policy freedoms was quickly nipped in the bud”. In South Africa – as in Turkey in 2019 – the central bank president was not replaced when he was fighting inflation with high interest rates. In contrast, South Africa’s central bank maintained a restrictive monetary policy despite the difficult economic situation.