Turkey – Currency crisis

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General Outlook


On August 14th, Turkish Lira plunged to an all-time low of 1 USD = 6.95 TRY, losing more than 40% value since the beginning of the year.


Since early 2018, financial markets began to sanction vulnerable emerging markets amid an ongoing withdrawal of global liquidity, which has been mainly a result of continued monetary tightening in the United States.


Among the markets who suffered, Turkey and the Argentina were the flagships with the former having multiple reasons for its extreme vulnerability which can be summarized as below:


  • Lasting economic policy mistakes, resulting in fading investor confidence,
  • Doubts regarding the independence of the Central Bank of the Republic of Turkey, especially with regard to monetary policy,
  • The persistently large current account deficit,
  • Bank credit loans increase of over +20% y/y,
  • The very high corporate sector debt of 65% of GDP of which about 56% was denominated in foreign currencies,
  • Rapidly rising short-term debt obligations that exceeded official foreign exchange reserves more than twice since end-2017



According to the Bank for International Settlements, international banks had outstanding loans of $224 billion to Turkish borrowers, including $83 billion from banks in Spain, $35 billion from banks in France, $18 billion from banks in Italy, $17 billion each from banks in the United States and in the United Kingdom, and $13 billion from banks in Germany.


Istanbul Finance District

Timeline of the major events


  • Between February and April, two of Turkey’s largest conglomerates; Yildiz Holding and Dogus Holding have requested debt restructurings of respectively USD 7 bn and USD 3.6 bn,


  • On April 18th, President Erdogan announced that the upcoming general election would be held on June 24, eighteen months earlier than scheduled. (USD/TRY = 4,08)


  • In May, weak data and increasing concerns about the independence of the Central Bank, especially in regards to monetary policy brought the first weave of considerable sell off of Turkish Lira. The late 300bps raise of a key interest rate, from 13.5% to 16.5% in an emergency meeting of the Central Bank stabilized the currency temporarily, but did not prove to be enough (USD/TRY = 4,65).


  • In August, markets lost their entire confidence in Turkey as the Central Bank fails for the third month to raise interest rates despite surging inflation. A political feud between Turkey and the U.S. ending in sanctions against Turkey including doubling of tariffs on Turkish steel and aluminum. The lira depreciated by 14% in a single day and by 24% over the course of the month. (USD/TRY = 6,95)


The controversy on the Central Bank’s independence


Describing himself as “an enemy of interest rates” for years and calling them “the mother and father of all evil”, President Erdogan adheres to an unorthodox theory which claims that the key to lower the inflation is to lower the interest rates. For years he lashed out at and tried to interfere with the Central Bank and other financial institutions, urging them to lower interest rates.

In May 2018, in a televised interview and in a meeting with global money managers, he announced that after the elections, he intended to take greater control of the economy, including de facto control over monetary policy, and to implement lower interest rates. This caused "shock and disbelief" among many investors about the central bank's ability to fight inflation and stabilize the lira.

In early July, after winning the elections President Erdogan by presidential decree, appropriated to himself the authority to appoint the central bank governor, his deputies and the monetary policy committee members.

President Recep Tayyip Erdoğan


The Central Bank defies Erdogan

Finally, in a bid to stem the currency crisis that has rattled markets worldwide, on September 13, the Central Bank of Turkey sharply raised its benchmark interest rates by 625 basis points to 24%, defying the call by President Erdogan just hours earlier to lower borrowing costs.


President Erdogan reacted the next day in a meeting of the members of his ruling AK Party, by announcing that “It’s currently my phase of patience but there is a limit to this patience,” and warning that his restraint won’t last forever. (Oct. 1,  USD/TRY= 5,94)


Turkey’s new economic plan

On September 20, the Minister of Finance and Treasury, Berat Albayrak, announced the new economic action plan for the country, revising down growth forecasts and heralding saving measures for 2019.


According to the new economic plan:


  • A “Public Finance Transformation Office” is to be established,
  • A stabilization process with disciplined public finance will be supported,
  • All upcoming tenders concerning public projects that haven’t yet started will be suspended indefinitely,
  • All the mega / infrastructure projects will be financed directly via international funding sources,
  • Saving measures of TRY 75,8 billion will be included in 2019 budget.
  • The social insurance scheme will be revised.


Government predictions following the new plan:


 GDPCons. Price
Current Acc.
Budg. Balance
to GDP
Prim. Balance
to GDP
2019+ 2.3%15.9%-3.3%-1.8%0.8%
2020+ 3.5%9.8%-2.7%-1.9%1.0%
2021+ 5.0%6.0%-2.6%-1.7%1.3%


The current state of the things

The Turkish lira may have recovered from the worst of the currency crisis, but signs of a looming economic slowdown are everywhere and it seems unlikely that Turkey will soon recover from its deepening economic crisis.


According to a recent Euler Hermes economic research report, a series of recent economic data releases indicate a collapse in business and consumer sentiment, highlighting the potential for a sharp slowdown in business investment and consumer spending in Q4. The report then goes on predicting that it will get worse in the near term (higher inflation, credit crunch, sharp growth slowdown) before it gets better for the Turkish economy and heralds a baseline scenario of a hard landing of the economy, with at least three quarters of negative growth in H2 2018 and H1 2019.


Also, as for how this all affects the everyday lives of Turkish people, a September 2018 report by the Banks Association of Turkey Risk Center announced that the country has witnessed an 18% increase in the number of people facing lawsuits due to bank loan debt in the first nine months of the year as compared to the same time period last year, bringing that number to 600,000!



#Turkey’s currency crisis though stopped by Central Bank’s rate hike will push the country into recession. Additional policy actions are needed and clearly financial market confidence will prove instrumental to restoring Turkey’s economic stability.

– Ludovic Subran, Euler Hermes’ Chief Economist



The impact on Credit Insurance Market

Following the sharp depreciation of the local currency and the expected deterioration of the Turkish economy in general, the insurance companies tightened their positions significantly on most Turkish debtors and proceeded with significant, large scale limit decrease plans to reduce their total exposure.


In short to midterm, we expect the underwriters to be even more prudent and to only accept risks on solid Turkish debtors, while closely monitoring the developments.


On the other side of the spectrum however, the demand for credit insurance keeps ever increasing in parallel to an increase in risk awareness of the companies.


As a result, although the depreciation of the currency and the high inflation rate both played significant parts in it too, the credit insurance market size ended up increasing by 40% in the last 12 months.



 September 2018September 2019
InsurerTotal PremiumM. Share %Total PremiumM. Share %
CofaceTRY 69.632.02038,64%TRY 46.741.31136,32%
Euler H.TRY 68.817.88538,19%TRY 43.966.25834,17%
AtradiusTRY 41.762.64223,17%TRY 37.968.11829,51%
TOTALTRY 180.212.547TRY 128.675.686


All the written material is the property of Integra Broker, this article has been written by Onur Aksu.