<p>The recent shift was likely two major interrelated reasons:</p>

<p>First, there was already relatively high uncertainty regarding the future viability and value of the currency (as @zeta-band noted, they're already incurring high deficits).</p>

<p>Second, Erdogan has made statements suggesting that, if re-elected, he'll take more direct control over the central bank. Given that he'd likely institute policies that would lead to higher inflation (or force haircuts on foreign debt holders), investors see that as a worrying potential future outcome.</p>

<p>Though at the same time, the rising interest rates (which, while lower than rates in Turkey, are higher than they were previously) in other Western countries has made investment in places other than Turkey more alluring, which also can devalue the Lira.</p>

<p>EDIT 2:</p>

<p>Perhaps clarifying that sentence a bit would be helpful (I left off an implied phrase, which is bolded below, which might have led to confusion)</p>

<blockquote>
  <p>rising interest rates in other Western countries has made investment in places other than Turkey more alluring <strong>than they comparatively used to be.</strong> </p>
</blockquote>

<p>I'm saying investors consider a variety of different factors when deciding where to invest. If everything about two countries was absolutely equal (both currently and into the future) then we would expect the investor to put more money in the country who has comparatively higher interest rates. However, this <em>all else being equal</em> assumption clearly never holds in the real world- countries have different political risks, economic risks, exchange rate risks, etc. that investors consider. </p>

<p>At the same time, even if every investor evaluates all of these risks identically (meaning everyone looks at the risks in both countries and agrees how likely each event is to occur, and how each one would affect any given investment) we'd still expect to see some variation in investment patterns. Why? Because every investor is optimizing over an entire portfolio, and is considering different specific investments. Additionally, every investor has their own risk preference, a more risk averse investor might be willing to forgo a higher expected return in one country for the comparative "safety" of another.</p>

<p>Which takes us back to the case of Turkey. It's true that the interest rates set by the Turkish government are quite high compared to other countries. However, if you're a US-based long term investor (meaning here the projects you'd be investing in wouldn't allow you to get a return on your investment for a long time) you might be worried about other perceived risks (like future inflation) that would make the high interest rate not enough to overcome the potential risks.</p>

<p>So what do we see? We see that there are some international investors who choose to invest in the US (or Europe, China, India, etc.- just not Turkey), some who choose to invest in Turkey, and some who split their resources between them. Furthermore, we can ask a hypothetical question: for investors in group 1 (non-Turkey investors), all else equal, how high would the interest rate have to be to induce you to invest? Clearly the answer is higher than the current rate, but at the same time, we'd expect at least some of them to shift investment if the Turkish interest rates were 75%. Clearly, as the Turkish interest rate goes up, more and more of those investors would shift resources into Turkey.</p>

<p>What we can then do, however, is consider that second and third group of investors (those who invest at least some of their resources in Turkey) and as them "how would your portfolios change if the US interest rate wasn't 1 or 2%, but 50%?" Obviously, we'd expect those investors to shift at least some of their investments from Turkey to the US.</p>

<p>The critical thing, however, is that there isn't a discontinuity. That means that as one country raises their interest rates a bit, some investors would likely shift some of their resources into that country. What we care about is the <em>marginal</em> investment in each country- the investment that was only just <em>barely</em> worth it given the conditions. These are the investments that we expect to shift.</p>

<p>So in conclusion, what's driving the devaluation is two fold. On one hand, there's a perception of increasing risks inside Turkey. On the other, the return for investing in places like the US are increasing from what it was previously. These two forces (one pushing down the attractiveness of investment in Turkey; one pushing up the attractiveness of investment in the US) are working in the same direction- to push investment out of Turkey, devalue the currency, and push them into other countries.</p>

CC BY-SA 4.0
2018-07-25T14:43:08.390Z
`the higher interest rates in other Western countries`  I down vote this, Citation required  !
mootmoot
CC BY-SA 4.0
2018-07-25T18:24:18.930Z
@mootmoot What are you looking to be cited? Increases in interest rates in other countries? I was mostly thinking the US https://tradingeconomics.com/united-states/interest-rate UK https://tradingeconomics.com/united-kingdom/interest-rate and Canada https://tradingeconomics.com/canada/interest-rate If you mean the broader point: https://www.ft.com/content/e1ccec34-4f6a-11e8-a7a9-37318e776bab
AndrewC
CC BY-SA 4.0
2018-07-26T08:12:00.737Z
Let's put it straight, Turkey current average bank interest rates is around 18%.  Just tell me which western Europe and US are able to give interest rate higher than this ?  You should rephrase it or remove that line
mootmoot
CC BY-SA 4.0
2018-07-26T17:12:03.580Z
@mootmoot They don't need to give outright higher rates. The point is that investments that (given other conditions) were worth it for international firms to undertake with the US rate at 1% might not be if the US rate is 2%. This is fundamental economic theory. For further evidence of this being true, see https://www.ft.com/content/60de4d90-6edf-11e8-92d3-6c13e5c92914 which makes the connection explicit.
AndrewC
CC BY-SA 4.0
2018-07-26T17:15:11.613Z
@mootmoot Does that edit satisfy your issue?
AndrewC
CC BY-SA 4.0
2018-07-27T07:01:24.920Z
The phrase is still the same. Your comment of `US 1% rate is more than other countries` still doesn't support the fact and say nothing about risks. It is rather strange that your 1st and 2nd paragraph mentioned about policies risk but your last paragraph sway away from it.  First, few business can really make 10% profit margin, so Turkey current average 18% bank interest rates is rather better than business, it attract deposit. Second, high interest will burden business that base on bank loan. Third, high interest payout need funding.
mootmoot
CC BY-SA 4.0
2018-07-27T13:43:25.563Z
@mootmoot The first two paragraphs describe potential downsides of doing business in Turkey, while the last one highlights the increasing attractiveness in other places. Honestly, at this point, I'm not entirely sure what would make you satisfied, since you clearly don't accept basic economic reasoning backed up by respected sources. You're speculating about things which are not only inconsistent with the observed reality (the Lira dropping in value and decreases in foreign investment) but aren't backed up by any consistent theory. Why not post your own answer if these are so flawed?
AndrewC
CC BY-SA 4.0
2018-07-27T15:24:57.943Z
I don't understand why you insist of keeping the line `rising interest rates in other Western countries has made investment in places other than Turkey more alluring`.  Because currently NO western economy are able to surpass Turkey insane bank interest rates.   If you want to highlight why investments outside Turkey are more attractive, then you should have mentioned the negative and the risks of the high Turkey interest rate, e.g. high cost to non-speculative business investment; risk of Lira inflation(printing more money) for the bank to pay out the interest in mid term.
mootmoot
CC BY-SA 4.0
2018-08-16T16:06:43.223Z
@mootmoot Just added a bunch to the answer, hope that helps clarify a bit.
AndrewC
CC BY-SA 4.0
2018-05-25T13:59:11.187Z
2018-08-16T16:04:33.193Z
2018-08-16T16:04:33.193Z
AndrewC
<p>In a short word, it's "Uncertainty", uncertainty about the future. 
Investors don't like that.</p>

<p>Investors like poltical stability, tend to favour democracies (not always) where there's rule of law. This is essential for certainty that their investments will stay theirs, and not suddenly nationalised or something else. Another type of statbility is price stability. Both type of stabilities may play complementary roles, since soaring inflation can cause social and political unrest, or vice-versa, political unrest causes domestic currency to slide, leading to price inflation.</p>

<p>After this last election, at least two factors were instrumental to this increasing of uncertainty: soaring inflation, and the Turkish Central Bank failing to raise interest rates, despite the inflation being 3 times the official target. The second factor Erdogan is not exactly a stable democratic guy... With this last election, he gets increased powers, due to a recent change in the constitution, and he also promised to exert more pressure over monetary policy, which may explain why the TCB hasn't increased rates, and also he put his Son-in-Law as Finance Minister. </p>

<p>A third factor which definitely doesn't help is that markets have changed their feeling towards emerging markets, due to the strong dollar (rates have been rising), and the impending trade war, with the slowing of the chinese economy.</p>

<p>How can we expect the markets not to react to this?</p>

<p>References: Several articles of the Financial Times, among which <a href="https://www.ft.com/content/5f389ec8-8f23-11e8-bb8f-a6a2f7bca546" rel="nofollow noreferrer">Turkish lira tumbles after central bank keeps interest rates steady</a>, <a href="https://www.ft.com/content/c114d1ca-90d6-11e8-b639-7680cedcc421" rel="nofollow noreferrer">Sliding lira sets off alarms bells for Turkey’s businesses</a>, <a href="https://www.ft.com/content/e2354d1e-7aea-11e8-bc55-50daf11b720d" rel="nofollow noreferrer">Strong dollar leaves emerging markets on edge for rest of 2018</a>.</p>

CC BY-SA 4.0
2018-07-27T15:31:31.543Z
`Turkish Central Bank failing to raise interest rates`.  An average 18% interest rates is already insane, well perhaps one should spell ARGENTINA.    With 18%~25%, that's mean anyone with money SHOULD NOT invest, but put their money in the bank.  But WITHOUT making money from the business loan, how the world the bank pay the high interest rate?   This already make the bank closely resemble a Ponzi scheme. Do you want to put your money in a Ponzi scheme that pay 40% interest ?
mootmoot
CC BY-SA 4.0
2018-08-16T16:06:24.213Z
@mootmoot an 18% interest rate is only high if inflation is low. Currently, inflation is hitting 15%, which means the actual return is much lower.
AndrewC
CC BY-SA 4.0
2018-08-21T12:46:28.273Z
@mootmoot see Fischer's equation. It may be useful to you ;) https://en.wikipedia.org/wiki/Fisher_equation
An old man in the sea.
CC BY-SA 4.0
2018-07-27T07:30:17.107Z
2018-07-27T07:40:24.250Z
2018-07-27T07:40:24.250Z
An old man in the sea.
<p>Actually the reason is simple: the return value of the Turkish lira is so lower that investors and individuals don't want to hold it in their accounts. But why is it so? </p>

<p>First of all, the CBRT doesn't follow the traditional monetary policy theory. Artificially lower interest rate is still in force, and there is not much sign that the CBRT will return to sufficiently tighter policy sooner. Interest rate should have been set around 35-40% while it is still being kept around 20%. An episode resembling to that of today had happened in 1994 during which Tansu Çiller was the prime minister, who was just another conservative political leader, and thanks to the right contractionary policy followed by the CBRT at that period depreciation of the Turkish lira was bearable in 1994. Today the CBRT just doesn't follow what it is supposed to do.</p>

<p>Monetary policy is not the real answer, of course. Even if the CBRT starts to do its job properly, without the necessary structural reforms the Turkish economy will continue to suffer from unstable growth rates and weak innovation capacity. AKP and Erdogan have proven themselves as unable to complete these reforms, in fact they have even revoked many crucial economic reforms made before. IMF has had prepared a nearly excellent guide for Turkey about how to conduct structural reforms, and for unknown reasons AKP smoothly followed this guide in its first 5 years. Today Turkey is in an urgency to get together with IMF again and prepare a new set of economic reform plans. I guess that this will happen sooner than many expect.</p>

CC BY-SA 4.0
2018-07-25T14:56:16.563Z
`Interest rate should have been set around 35-40%`   I down vote because of this line. It seems you try to suggest to inflate the money further ?
mootmoot
CC BY-SA 4.0
2018-07-26T15:06:12.447Z
You should first learn what is inflation haha
Osman Bulut
CC BY-SA 4.0
2018-07-27T06:43:59.493Z
So to you, money is indeed growth on the tree ? Which government in the world are able to make a business that reap more than 40% return to pay for the say interest  mentioned by you ?
mootmoot
CC BY-SA 4.0
2018-07-25T08:42:40.700Z
2018-07-25T08:42:40.700Z
Osman Bulut
<p>I guess there is a some fundamental issues in the economy but I wonder the apparent reason of the recent devaluation in Turkish Lira?</p>

<p>Does Turkey need to pay debt in very short term? How much is it? What is the reason of the debt? </p>

CC BY-SA 4.0
2018-07-25T14:58:52.147Z
An average 18% bank interest rate spell a monetary inflation issue
mootmoot
CC BY-SA 4.0
2018-05-23T16:49:15.440Z
Turkey is currently (Spring 2018) buying more stuff than they are selling. So they need to sell Lira to buy the FX to buy the stuff. Not a complete answer, but certainly a factor.
zeta-band
CC BY-SA 4.0
2018-05-25T10:05:12.357Z
Well, I can imagine that, but what are they buying extraordinarily?
Kutadgubilig
<exchange-rates>
What is the reason of devaluation in Turkish Lira?
Kutadgubilig
# What is the reason of devaluation in Turkish Lira?

(Asked by: username_0 on 2018-05-23)

I guess there is a some fundamental issues in the economy but I wonder the apparent reason of the recent devaluation in Turkish Lira?

Does Turkey need to pay debt in very short term? How much is it? What is the reason of the debt?

**Tags:** exchange-rates
> **Comments:**
> **username_2**: Turkey is currently (Spring 2018) buying more stuff than they are selling. So they need to sell Lira to buy the FX to buy the stuff. Not a complete answer, but certainly a factor.  
> **username_0**: Well, I can imagine that, but what are they buying extraordinarily?  
> **username_1**: An average 18% bank interest rate spell a monetary inflation issue  

---

## 3 answers

### Answer by username_3 on 2018-05-25. Score: 3

The recent shift was likely two major interrelated reasons:

First, there was already relatively high uncertainty regarding the future viability and value of the currency (as @zeta-band noted, they're already incurring high deficits).

Second, Erdogan has made statements suggesting that, if re-elected, he'll take more direct control over the central bank. Given that he'd likely institute policies that would lead to higher inflation (or force haircuts on foreign debt holders), investors see that as a worrying potential future outcome.

Though at the same time, the rising interest rates (which, while lower than rates in Turkey, are higher than they were previously) in other Western countries has made investment in places other than Turkey more alluring, which also can devalue the Lira.

EDIT 2:

Perhaps clarifying that sentence a bit would be helpful (I left off an implied phrase, which is bolded below, which might have led to confusion)

> rising interest rates in other Western countries has made investment in places other than Turkey more alluring **than they comparatively used to be.**

I'm saying investors consider a variety of different factors when deciding where to invest. If everything about two countries was absolutely equal (both currently and into the future) then we would expect the investor to put more money in the country who has comparatively higher interest rates. However, this *all else being equal* assumption clearly never holds in the real world- countries have different political risks, economic risks, exchange rate risks, etc. that investors consider.

At the same time, even if every investor evaluates all of these risks identically (meaning everyone looks at the risks in both countries and agrees how likely each event is to occur, and how each one would affect any given investment) we'd still expect to see some variation in investment patterns. Why? Because every investor is optimizing over an entire portfolio, and is considering different specific investments. Additionally, every investor has their own risk preference, a more risk averse investor might be willing to forgo a higher expected return in one country for the comparative "safety" of another.

Which takes us back to the case of Turkey. It's true that the interest rates set by the Turkish government are quite high compared to other countries. However, if you're a US-based long term investor (meaning here the projects you'd be investing in wouldn't allow you to get a return on your investment for a long time) you might be worried about other perceived risks (like future inflation) that would make the high interest rate not enough to overcome the potential risks.

So what do we see? We see that there are some international investors who choose to invest in the US (or Europe, China, India, etc.- just not Turkey), some who choose to invest in Turkey, and some who split their resources between them. Furthermore, we can ask a hypothetical question: for investors in group 1 (non-Turkey investors), all else equal, how high would the interest rate have to be to induce you to invest? Clearly the answer is higher than the current rate, but at the same time, we'd expect at least some of them to shift investment if the Turkish interest rates were 75%. Clearly, as the Turkish interest rate goes up, more and more of those investors would shift resources into Turkey.

What we can then do, however, is consider that second and third group of investors (those who invest at least some of their resources in Turkey) and as them "how would your portfolios change if the US interest rate wasn't 1 or 2%, but 50%?" Obviously, we'd expect those investors to shift at least some of their investments from Turkey to the US.

The critical thing, however, is that there isn't a discontinuity. That means that as one country raises their interest rates a bit, some investors would likely shift some of their resources into that country. What we care about is the *marginal* investment in each country- the investment that was only just *barely* worth it given the conditions. These are the investments that we expect to shift.

So in conclusion, what's driving the devaluation is two fold. On one hand, there's a perception of increasing risks inside Turkey. On the other, the return for investing in places like the US are increasing from what it was previously. These two forces (one pushing down the attractiveness of investment in Turkey; one pushing up the attractiveness of investment in the US) are working in the same direction- to push investment out of Turkey, devalue the currency, and push them into other countries.

> **Comments:**
> **username_1**: `the higher interest rates in other Western countries`  I down vote this, Citation required  !  
> **username_3**: @mootmoot What are you looking to be cited? Increases in interest rates in other countries? I was mostly thinking the US https://tradingeconomics.com/united-states/interest-rate UK https://tradingeconomics.com/united-kingdom/interest-rate and Canada https://tradingeconomics.com/canada/interest-rate If you mean the broader point: https://www.ft.com/content/e1ccec34-4f6a-11e8-a7a9-37318e776bab  
> **username_1**: Let's put it straight, Turkey current average bank interest rates is around 18%.  Just tell me which western Europe and US are able to give interest rate higher than this ?  You should rephrase it or remove that line  
> **username_3**: @mootmoot They don't need to give outright higher rates. The point is that investments that (given other conditions) were worth it for international firms to undertake with the US rate at 1% might not be if the US rate is 2%. This is fundamental economic theory. For further evidence of this being true, see https://www.ft.com/content/60de4d90-6edf-11e8-92d3-6c13e5c92914 which makes the connection explicit.  
> **username_3**: @mootmoot Does that edit satisfy your issue?  
> **username_1**: The phrase is still the same. Your comment of `US 1% rate is more than other countries` still doesn't support the fact and say nothing about risks. It is rather strange that your 1st and 2nd paragraph mentioned about policies risk but your last paragraph sway away from it.  First, few business can really make 10% profit margin, so Turkey current average 18% bank interest rates is rather better than business, it attract deposit. Second, high interest will burden business that base on bank loan. Third, high interest payout need funding.  
> **username_3**: @mootmoot The first two paragraphs describe potential downsides of doing business in Turkey, while the last one highlights the increasing attractiveness in other places. Honestly, at this point, I'm not entirely sure what would make you satisfied, since you clearly don't accept basic economic reasoning backed up by respected sources. You're speculating about things which are not only inconsistent with the observed reality (the Lira dropping in value and decreases in foreign investment) but aren't backed up by any consistent theory. Why not post your own answer if these are so flawed?  
> **username_1**: I don't understand why you insist of keeping the line `rising interest rates in other Western countries has made investment in places other than Turkey more alluring`.  Because currently NO western economy are able to surpass Turkey insane bank interest rates.   If you want to highlight why investments outside Turkey are more attractive, then you should have mentioned the negative and the risks of the high Turkey interest rate, e.g. high cost to non-speculative business investment; risk of Lira inflation(printing more money) for the bank to pay out the interest in mid term.  
> **username_3**: @mootmoot Just added a bunch to the answer, hope that helps clarify a bit.  

---

### Answer by username_4 on 2018-07-27. Score: 2

In a short word, it's "Uncertainty", uncertainty about the future.
Investors don't like that.

Investors like poltical stability, tend to favour democracies (not always) where there's rule of law. This is essential for certainty that their investments will stay theirs, and not suddenly nationalised or something else. Another type of statbility is price stability. Both type of stabilities may play complementary roles, since soaring inflation can cause social and political unrest, or vice-versa, political unrest causes domestic currency to slide, leading to price inflation.

After this last election, at least two factors were instrumental to this increasing of uncertainty: soaring inflation, and the Turkish Central Bank failing to raise interest rates, despite the inflation being 3 times the official target. The second factor Erdogan is not exactly a stable democratic guy... With this last election, he gets increased powers, due to a recent change in the constitution, and he also promised to exert more pressure over monetary policy, which may explain why the TCB hasn't increased rates, and also he put his Son-in-Law as Finance Minister.

A third factor which definitely doesn't help is that markets have changed their feeling towards emerging markets, due to the strong dollar (rates have been rising), and the impending trade war, with the slowing of the chinese economy.

How can we expect the markets not to react to this?

References: Several articles of the Financial Times, among which [Turkish lira tumbles after central bank keeps interest rates steady](https://www.ft.com/content/5f389ec8-8f23-11e8-bb8f-a6a2f7bca546), [Sliding lira sets off alarms bells for Turkey’s businesses](https://www.ft.com/content/c114d1ca-90d6-11e8-b639-7680cedcc421), [Strong dollar leaves emerging markets on edge for rest of 2018](https://www.ft.com/content/e2354d1e-7aea-11e8-bc55-50daf11b720d).

> **Comments:**
> **username_1**: `Turkish Central Bank failing to raise interest rates`.  An average 18% interest rates is already insane, well perhaps one should spell ARGENTINA.    With 18%~25%, that's mean anyone with money SHOULD NOT invest, but put their money in the bank.  But WITHOUT making money from the business loan, how the world the bank pay the high interest rate?   This already make the bank closely resemble a Ponzi scheme. Do you want to put your money in a Ponzi scheme that pay 40% interest ?  
> **username_3**: @mootmoot an 18% interest rate is only high if inflation is low. Currently, inflation is hitting 15%, which means the actual return is much lower.  
> **username_4**: @mootmoot see Fischer's equation. It may be useful to you ;) https://en.wikipedia.org/wiki/Fisher_equation  

---

### Answer by username_5 on 2018-07-25. Score: 0

Actually the reason is simple: the return value of the Turkish lira is so lower that investors and individuals don't want to hold it in their accounts. But why is it so?

First of all, the CBRT doesn't follow the traditional monetary policy theory. Artificially lower interest rate is still in force, and there is not much sign that the CBRT will return to sufficiently tighter policy sooner. Interest rate should have been set around 35-40% while it is still being kept around 20%. An episode resembling to that of today had happened in 1994 during which Tansu Çiller was the prime minister, who was just another conservative political leader, and thanks to the right contractionary policy followed by the CBRT at that period depreciation of the Turkish lira was bearable in 1994. Today the CBRT just doesn't follow what it is supposed to do.

Monetary policy is not the real answer, of course. Even if the CBRT starts to do its job properly, without the necessary structural reforms the Turkish economy will continue to suffer from unstable growth rates and weak innovation capacity. AKP and Erdogan have proven themselves as unable to complete these reforms, in fact they have even revoked many crucial economic reforms made before. IMF has had prepared a nearly excellent guide for Turkey about how to conduct structural reforms, and for unknown reasons AKP smoothly followed this guide in its first 5 years. Today Turkey is in an urgency to get together with IMF again and prepare a new set of economic reform plans. I guess that this will happen sooner than many expect.

> **Comments:**
> **username_1**: `Interest rate should have been set around 35-40%`   I down vote because of this line. It seems you try to suggest to inflate the money further ?  
> **username_5**: You should first learn what is inflation haha  
> **username_1**: So to you, money is indeed growth on the tree ? Which government in the world are able to make a business that reap more than 40% return to pay for the say interest  mentioned by you ?  

---

