‘Buy gold now’, says Nick, my American colleague at the office who specializes in economy. My two French colleagues and me stand at his desk. We want to know about the trouble the Turkish lira is in, and he tries to explain it to us. ‘Gold?’, we say, our faces pretty desperate. ‘Gold is extremely expensive, why would anybody want to buy gold now?’. ‘Buy it with euros, sell it again in a two, three weeks for lira’s. You’ll make a profit.’
I don’t really have a talent for economy, to say the least. So I’m really happy with a colleague like Nick, who is always willing the explain some basics. It was about time that I got updated on the current state of Turkish economy. Every time I take money from my account, less euros are written off. There was a time that 100 Turkissh lira costed around 48 euro’s, now that’s down to 41. Nice for me, but I read alarming headline in the papers. Is Turkey headed for crisis again, like ten years ago?
No, it doesn’t look like that, says Nick. Sooner or later the Central Bank of Turkey has to intervene and increase the interest rate. That’s where the problem is. In the beginning of this year, the Bank decided to lower the interest rate, in order to make ‘inward’ investment less attractive. No, that’s not the same as foreign investment. Inward investment is coming into the country, and one sort of inward investment, ‘portfolio investment’, is risky: it can come in in big amounts if the interest rate is higher (don’t ask me why, forgot that part), which could cause too much money to come in and make inflation go up. Besides that, lower interest rates support exports, which was also one of the goals of the Central Bank.
Now, that all happened: exports up, less portfolio investments, inflation under control (new stats expected next week, probably around 6%). But now as a result of that, the Turkish lira has lost about ten percent of it’s value this year. And it’s still going down. Which makes imports expensive. That is for example bad news for an important branch of Turkey’s economy, car manufacturing. These businesses, like Koç Oto, import all the car parts and put them into cars in Turkey, to export them again. The Lira is so low now, that they loose more money importing the parts than they make with exporting the actual cars. Also banks are unhappy with the policy – but sorry, I didn’t understand why.
The way out? Not so difficult on paper: increase the interest rate. But in practice, that’s very difficult. The policy is carried out by the new boss of the Central Bank, Erdem Başçı. By increasing the interest rate, he would admit that lowering it was a mistake. That would be painful, so he’s not doing it. Big companies may be on their knees, banks may be angry, international experts may say: just increase the rate!, the Central Bank refuses. For now. Turkish stubbornness and pride at its best.