The Turkish lira and US$

The appreciation of the US$ in the recent months have been one of the most drastic ones in the history of Turkey. Since the economic downturn caused by printing money during the Menderes administration, Turkey has had chronic problems with appreciating foreign (Western) currency. During the 1990s, the Turkish lira was several years the least-valued currency. However, the recent appreciation of the US$ (or depreciation of the Turkish lira) could have some significant implications in the short term as well as the long term.

Theoretically, it can boost exports and increase incentives to replace import by the domestic industry. Perhaps Turkey's economy will get incentivized to produce and innovate local products and services. This development could provide Turkey with stronger economic foundations in the medium and long term upon which Turkey can escape the so-called medium-income trap. This trap is a result of a failure to advance the economy into more complex products. These complex products could be automobiles, IT, pharmaceuticals, and the like.

However, in Turkey's case, there's enough reason to believe that capital flight drives the appreciation of the US$. Investors take out capital and in doing so exchange Turkish liras for US dollars. The demand for US$ goes up as well as the supply of TL. This surge in the US$ value is partially explainable because of Turkish politics, specifically the government who scares off investors by some statements. But, political changes in the natural market of the US$, the US, is also an explanatory variable in the capital outflow in Turkey. Donald Trump has stated that he'd rebuild the crumbling American infrastructure among other things. Already, financial markets are rethinking their portfolio structures to get ready to provide the necessary funds for Trump's economic plans. Also, the central bank of the United States, the Federal Reserve System, has signaled that it would increase its interests rates. With Turkey's central bank being pressured to lower interests rates to free up capital for Turkey's domestic economic expansion, (institutional) investors are betting on the US, which does not contain to the Turkish economy, but emerging market states elsewhere.

There are also other explanatory variables in the case of the depreciating Turkish lira. In less dynamic situations, the Turkish lira would also depreciate due to the structural trade deficit of Turkey. Next to having no strong complex-products industries, Turkey also lacks critical energy resources within its borders. While Turkey is rapidly building an energy sector that not only would provide domestic consumers with an energy mix that also consists of substantive parts of renewables, Turkey is trying to become the energy corridor for Europe, which would increase Turkey's standing within the geostrategic dimension and possibly could boost Turkey's economy as an energy innovator while decreasing the costs of energy imports. Thus, this energy sector would not only mean that Turkey could reduce the costs of its imports and thereby decrease its trade deficit, but Turkey could also become a center for energy innovation, which could spill over to other industries as well. 

Unfortunately, with the recent securitization of non-security issues by the AKP, Turkey has a hard time in realizing the possibilities mentioned above. Moreover, this post only touches upon several issues of the Turkish economy, while the total amount of issues and problems are paramount. Furthermore, while a future without AKP is impossible in the coming terms of parliament and president, the opposition parties within Turkey also lack substantive alternatives while they keep increasing to base their legitimacy upon the countering the AKP.