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Turkish lira hits record low in the dovish monetary policy environment

August 7, 2020

Today the lira showed historical low against the USD, which deteriorates among its trade partners in terms of DXY

Currently, the USD/TRY pair is trading above 7.29.

The Turkish lira is one of a few examples of weak currencies among EM countries in a decade. Ten years ago, the exchange rate was 1.49 per USD. As a result, the lira depreciated by over 4.8 times.

Due to the devaluation of the national currency, Turkey has been demonstrating high consumer and producer inflation in past years. Both indices peaked in autumn 2018; now, consumer inflation is 11.7%.


While inflation is pretty high, the central bank has been cutting its rate during the last year and set its policy rate at 8.25%. So, Turkey has a negative real interest rate. It helps to loose lira against other currencies.

Over the last six years, the Turkish GDP has declined by 20% in USD terms to $754 billion.

Meanwhile, in lira terms, the country’s GDP was in a wide range (from +12 YoY to -3% YoY).

Turkish economy is experiencing serious challenges. It had been running a negative current account to GDP for a long time, only last year, it became positive due to the import contraction.

Turkey’s economy and currency inflows are highly dependent on tourism revenues. During coronavirus shutdowns, tourist arrivals in Turkey dropped to record lows. In June, 0.214 million people visited Turkey vs. 5.3 million a year ago.

The country’s rating is B1/B+/BB-. Last year the government debt was 33% of GDP, which is not a lot among other peers in the B+ group. Today, according to Cbonds data, government bond debt  equals $203.5 billion. 51% is denominated in the national currency, another 49% ($99 billion)- in foreign currencies, mostly in the USD.

Medium-term dollar bonds trade above 5% of the curve, while long-term ones are between 7-8%.


Turkey USD CDS are highly correlated with sovereign bond yields, which is represented in Euro-Cbonds Sovereign Turkey YTM eff. But this year there is a divergence, CDS added more than Turkish sovereign bond yields, due to QE from the Fed, which affected all yields.

Despite moderate external government debt, country (private+state) external debt fluctuates between $431 billion, which is about 57% of recorded GDP in 2019.

While the lira shows new lows against the dollar, the country's foreign exchange reserves dropped to levels of 2006 when they were about $50 billion. The central bank sells dollars to slow down the lira’s devaluation. But it is counterproductive because of the dovish monetary policy.



Company — Turkey
  • Full name
    Republic of Turkey
  • Registration country
    Turkey