Turkish lira expected to weaken further in 2024 

Diego Cupolo via Reuters Connect

• Predicted to lose one-third against dollar
• Inflation 62% in November
• Central bank governor’s tenure may end

Turkey’s currency will weaken by about one-third versus the dollar next year to hit new all-time lows, analysts predict, as a sharp increase in interest rates does little to tame domestic inflation or convince Turks to hold the ailing lira.

The tenure of Hafize Gaye Erkan, Turkey’s central bank’s governor appointed in June, may also prove fleeting if the president, Recep Tayyip Erdoğan, decides to revert to his unconventional economic beliefs.

The AK Party leader had long claimed that high interest rates were the cause of, not the cure for, rising inflation. As the central bank’s independence diminished under Erdoğan’s increasingly autocratic rule, benchmark interest rates tumbled to a three-year low of 8.5 percent in February.  

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That spurred a credit boom – banks’ net loans more than doubled from 2020 to 2022 – boosting the economy ahead of May’s parliamentary and presidential votes, but also intensified a long-term slump in the Turkish lira. It has lost 93 percent of its value versus the dollar over the past decade – and 28 percent in the first six months of 2023 alone.

Such prolonged weakness helped push annual inflation to 85.5 percent in October 2022, its highest this century, while Turkey also eroded much of its foreign currency reserves and imposed onerous requirements on banks as part of unconventional efforts to support the lira.

After Erdoğan’s surprise re-election, the veteran leader appointed market-friendly finance officials such as Erkan to try to reassure investors. The central bank has since hiked rates six times, its latest rise lifting the benchmark rate to a two-decade peak of 40 percent.

The rate rises have slowed the lira’s decline, but the currency is again weakening, hitting a record low of about 29 to the dollar in mid-December. Annual inflation was 62 percent in November, a 2023 high.

Interest rates rising

At its November 23 monetary policy committee meeting, which sets interest rates, the central bank forecast “12-month-ahead” annual inflation would be 43.9 percent.

The committee’s latest comments indicate it will raise interest rates further, but at a slower pace and magnitude than over the preceding few months.

While the central bank has tightened monetary policy, government spending remains expansionary, undermining the interest rate rises and stoking inflation.

“Monetary policy affects the economy with a delay but we’re unsure of the length of the delay – it could be a year, 18 months or longer still,” said Burçin Kisacikoğlu, assistant professor of economics at Bilkent University in Ankara.

S&P Global Ratings forecasts Turkey’s real GDP growth will more than halve year-on-year to 2.3 percent in 2023, and predicts a “sharp currency depreciation”, with the lira falling to 40 to the dollar in 2024.

Vikas Lakhwani, chief revenue officer at trading platform CPT Markets, said the lira is unlikely to hold at current levels, could break below 30 before year-end and will fall a further 20 percent versus the dollar next year.

Kisacikoğlu said: “It’s not the central bank that’s deciding when the interest rate rises will stop – it has to convince Erdogan. We can’t really know how far the lira will fall, but 40-to-the-dollar by 2024-end seems reasonable because inflation won’t be under control any time soon.”

Interest rates on lira deposit accounts were 40.8 percent as of November 17, up from 24.9 percent in August, but still negative in real terms when inflation is included.

As part of efforts to support the lira, the banking regulator introduced forex-protected lira accounts in which savings are covered against currency declines. As the lira falls, customers receive additional fees to offset this devaluation, paid for by the government.

International reserves down

Turkey’s international reserves, excluding gold, will be $57.4 billion in 2023, down from $77.8 billion a year, according to S&P Global data.

March 2024’s municipal elections, in which the AK Party will attempt to win back control of Turkey’s major cities, adds further uncertainty over potential interest rate moves and the effect these could have on the lira.

Expectations of further lira declines have also become a self-fulfilling prophecy as consumers buy foreign currencies and tangible assets such as cars and gold, hastening lira depreciation.

“Exchange rates are a forward-looking variable,” said Kisacikoğlu. “If Turkey doesn’t offer positive real rates, there’s no reason for people to switch from foreign currencies to the lira. Interest rates are too low to compensate for the country risk associated with Turkey.”

The position of central bank governor Erkan is also uncertain. A much-lauded predecessor, Naci Ağbal, lasted only five months, from November 2020 to March 2021.

“The new team promised lower inflation, more foreign investment, an end to lira depreciation,” added Kisacikoğlu. “None of these have happened so far.

“There are worries that there might be another Naci Ağbal moment before the team can accomplish their goals. Forecasting the lira means forecasting the president’s views on these matters. And that’s an impossible task.”