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The real value of your Turkish Lira savings

2 June 2013

The real value of your Turkish Lira savings

From the people I speak to, I realise that many of us here in the TRNC count on our TL bank interest to maintain our income.

What worries me, is that over the last two weeks, we have seen a substantial weakening of the Turkish Lira against sterling and the US$. This drop has been quick and substantial and currently the lira stands at roughly TL 2.85 to £1. At the same time, the Turkish Lira also fell to its lowest level in 17 months against the US$.

While fluctuations like this are perfectly normal, I do worry that this recent weakening is due to factors that have not yet played out. The Turkish lira still has room to fall, in fact I’d not be surprised to see it hit TL 2.97 against the sterling. This would effectively mean that anyone who put £100k in the bank here just 3 months ago (and converted it to TL) would now be looking at a loss of nearly £1,100 if they converted it back – a considerable chunk of cash to most people.

Why This Happens

For many months, the Federal Reserve in the US has been buying Treasury and mortgage debts to support the US economy. When I say buying, I mean in big numbers. We’re talking about approximately $85 billion every month. However the Chairman of the Fed, Mr Ben Bernanke said a couple of weeks ago that this support may be reduced ‘in the next few meetings’ if the economy continues to improve.

So last week, we saw the first signs of the US economy improving as US consumer confidence rose to its highest level in 5 years. This fueled fears that Fed buying and support would be reduced in the short term and that winding back would reduce the US$ that have flooded the world with cash.

Investors panicked and began to return to the security of their local currency (US$ and £) rather than chase higher and therefore riskier interest rates overseas.. Emerging market currencies were all hit and Turkey and South Africa were the worst hit as they have some of the largest current account deficits in the emerging markets. That means that their imports are far higher than their exports and they rely on borrowing to make up the difference.

Turkish bond prices fell as selling grew and demand for them reduced. Yields rose quickly to their highest level since October 2008. Yields on two-year benchmark Turkish bond climbed to 6.08 % from a record low of 4.62% just three weeks ago.

These falls are the beginning of the unwinding which saw Turkish assets such as stocks and bonds rise to record levels while monetary easing from the UK and US pushed cash into their markets.

Interest rates to rise

Actually, interest rates have already risen because bond yields are now going up. However, very few of us are trading bonds so we don’t get very excited about it. Of more importance to us is how the banks will react to rising bond yields. Banks will be looking at that when they set their interest rates for TL deposits and the trend has to be a strengthening of interest rates.

These latest currency losses and increases in bond yields will worry the central bank. The message they are sending is a strong one: that interest rates have been pushed too low. Some of the latest reductions in Turkish Lira interest rates may have been done for political reasons, although the markets are saying that these rates have come down too fast.

It is likely that this message will get stronger because when global risk appetite was high, Turkey was a winner, but it will be one of the worst losers if investor fears continue grow.

Last week the market was also hit by the announcement of the April trade deficit. This rose from US$ 6.6 last year US$ to 10.3 billion from – far worse than forecasted. This will further reduce appetite for the Turkish Lira just at a time when more investors are required to help finance the gap.

I will be monitoring the trends on TL exchange and interest rates will include my thoughts in a regular series of articles. In the meantime, please do feel free to leave your comments or questions below.

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