A monetary train-wreck in Turkey

The Turkish lira has lost more than 60% of its value against the dollar over the past five years, and it's all down to poor monetary policy.

Turkish shares have rallied on hopes that a period of monetary misrule is coming to an end. Inflation is at 12%, but strongman leader Recep Tayyip Erdogan believes in the “bizarre” idea that higher interest rates cause inflation rather than curb it, says The Economist. The central bank has thus resisted desperately needed rate hikes this year, instead “squandering more than $100bn” in currency reserves in a forlorn attempt to defend the currency over the summer.  

The Turkish lira has lost more than 60% of its value against the dollar over the past five years owing to poor monetary policy. Yet this month has seen the replacement of both the central bank governor and finance minister. The lira has rallied on hopes that they will usher in a period of more sensible policy, while local stocks are up by 14% so far this month.  

Turkey’s economic management has long been a “train-wreck”, writes Craig Mellow in Barron’s. A buoyant European economy and plenty of cash from tourism helped Turkey dig its way out of its last currency crisis in 2018, but this year tourists will be staying at home. Erdogan didn’t learn his lesson from that episode and soon returned to “pumping credit…revving inflation and depressing the lira again”, precipitating the current problems. The recent stockmarket jumps show that the brave can make a buck in Turkey, but it looks more like gambling than investing.

Recommended

Emerging markets fall behind their developed-world counterparts
Emerging markets

Emerging markets fall behind their developed-world counterparts

While developed-world markets look forward to a recovery, emerging market stocks have tumbled as foreign investors pull out cash.
16 Apr 2021
Four of the best investment trusts for investing in emerging markets
Investment trusts

Four of the best investment trusts for investing in emerging markets

Investors need to tread very carefully in this risky sector. Here are the best ways to approach it
22 Mar 2021
Storm brews in emerging markets as investors pull cash out
Emerging markets

Storm brews in emerging markets as investors pull cash out

Foreign investors have begun to pull cash out of emerging markets as they begin to look less attractive when compared to the rising return from holdin…
12 Mar 2021
I wish I knew what an emerging market was, but I’m too embarrassed to ask
Too embarrassed to ask

I wish I knew what an emerging market was, but I’m too embarrassed to ask

This week's “too embarrassed to ask” explains what emerging markets are, and why you might want to invest in them.
9 Sep 2020

Most Popular

US stocks look expensive – here’s what to own instead
Investment strategy

US stocks look expensive – here’s what to own instead

Right now, US stocks are among the most expensive in the world. So if you want a decent return on your investments, you should look into diversifying …
17 May 2021
How will Joe Biden’s capital gains tax rise affect crypto prices?
Bitcoin & crypto

How will Joe Biden’s capital gains tax rise affect crypto prices?

The US president wants to increase capital gains tax – and that’s going to hit a lot of American cryptocurrency speculators. Saloni Sardana looks at h…
14 May 2021
Inheritance tax planning: the rules around gifting
Inheritance tax

Inheritance tax planning: the rules around gifting

There are plenty of legal ways to minimise an inheritance tax bill. Perhaps the simplest is to give away assets to reduce the size of your estate. Dav…
11 May 2021