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Turkish lira under attack from inside and out

The Iranian rial has been in freefall since Donald Trump abandoned his predecessor's nuclear deal with Tehran. The Russian rouble has fallen sharply following Trump's imposition of new sanctions a week ago. The euro and Chinese renminbi have both been under pressure in recent months because of Trump's 'trade war'. Last year it was the Mexican peso and Canadian dollar which suffererd as Trump threatened to tear up trade agreements.  Now, it's the Turkish lira's turn.

The lira has nearly halved in value against major currencies since ECA's March 2018 Cost of Living Survey. It has fallen 25% against the US dollar in August alone. President Erdogan is, of course, blaming Trump and other foreign actors for Turkey's plight, but actually most of the factors driving down the lira's value are his own fault.

Following his recent election victory, Erdogan took even more power into his own hands and put his son-in-law in charge of the finance ministry, effectively ending the independence of the central bank. Investors, funnily enough, prefer the monetary policies behind the currencies they buy into to be managed by experts, whereas Erdogan seems to fundamentally misunderstand how interest rates work, so the president's moves were deeply unnerving, sparking the run on the lira. 

Erdogan's economic policies over many years do not necessarily inspire confidence either. Although GDP growth has been impressive of late, especially in 2017, much of it has been based on arguably excessive government spending and Erdogan's insistence that interest rates stay low - indeed, much lower than they should be, which has encouraged excessive borrowing. Those policies have added to soaring inflation (latest 15.9%) and have produced a large current account deficit and considerable debts. Those who have borrowed in foreign currencies, including many commercial banks, could now find themselves in serious repayment difficulties following the collapse of the lira's value.

It is easy for Erdogan to blame Trump, who has not only imposed sanctions on two Turkish ministers in retaliation for the arrest of an American pastor in Turkey, but has also doubled tariffs on Turkish steel and aluminium exports to the US. However, like Trump, Erdogan is rarely a man for compromise. Other leaders might have quietly released the pastor and Trump most likely would have moved on, perhaps leaving tariffs alone. But Erdogan's latest response, on 14 August, has been to announce a boycott of American electronic products - not a move designed to encourage Trump to compromise! The two adversaries probably deserve each other. Unfortunately, the global economy deserves neither.

If you have expatriate staff either in or from Turkey, the impact of the lira's slump on their purchasing power will vary and largely depend on how they are paid. Despite high-and-rising inflation, assignees there who are paid in home country currency could actually see their cost of living fall, as a weak lira means they need less home country currency to obtain the same amount of host currency. If your assignees have split pay, they are protected from currency fluctuations already providing the split is adequate and they do not need to transfer money across.

Turkish expatriates abroad who are paid partly or wholly in lira could soon be struggling to maintain their purchasing power and their situations may need to be reviewed. However, we would always advise caution when a geo-political episode such as this is still ongoing, as it remains unclear in what direction the Turkish lira will move in the coming days and weeks. You never know, someone might learn to compromise!

ECA's September 2018 Cost of Living Survey opens next week and we would strongly advise you to encourage your assignees in Turkey to take part, so they can feed back to us the price changes they are observing. The survey results will be published in November, and will reflect the latest prices and exchange rates.

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