World Economy

Turks Move to Dollarization

Turks Move to DollarizationTurks Move to Dollarization

With the Turkish lira losing value each day against the dollar, the share of foreign currencies in the total deposits held by Turkish lenders spiked from 37% in January to 43% in July, indicating that people are disfavoring lira as an instrument of investment.

Since the start of 2015, the amount in foreign currency has risen from $157.7 billion to $179.1 billion; however, over the same period, the volume of money held in lira accounts has declined from $265.9 billion to $237.4 billion. The lira lost 13% of its value against the US dollar over that six months and market experts point to political uncertainty and external pressures as the main drivers of what they are calling “dollarization,” Today’s Zaman reported.

Already one of the worst performing emerging market currencies, the Turkish lira hit its weakest-ever level–2.80 against the US dollar–on June 8, a day after the June 7 parliamentary election that ended the 13-year single-party rule of the Justice and Development Party (AK Party).

Far from simmering down, however, the lira has hovered between 2.76 and 2.79 ever since. Trade unions and businesspeople have persistently called on politicians to compromise on a coalition formula, brushing off snap election scenarios; yet no agreement has yet been reached, prompting concerns over the continuation of the recent political uncertainty.

Regarding external pressures, the recovery in the US economy in recent years is expected to trigger an interest hike by the US Federal Reserve, pushing emerging market currencies deeper downwards since the hike is likely to attract investment into the US from developing markets.

A recent Reuters survey expected a further weakening in the value of Turkish lira and estimated that the currency would drop as low as 2.9 against the US dollar by the end of the year, suggesting that concerns will remain close at hand.

The dollar was priced at TL 2.77 at the start of Friday, rising to as high as TL 2.79 during the day after terrorist attacks in southern Turkey and the announcement of favorable unemployment data in the US. While the dollar was traded at TL 2.78 the euro was priced at around TL 3.03, and Turkey’s stock market Borsa Istanbul lost 0.11% to decline to 78.71 points at 5.25 pm.

Markets have fixed their gaze on a possible announcement from the global ratings agency Moody’s, which was expected to give its latest assessment of the Turkish economy. The agency’s current rating for Turkey is Baa3 and it maintains a negative outlook on Turkey’s banking sector.