Skip to content

Turkish Dollarlization

Turkey has essentially embraced a dollarlization policy.  The reasons for this are both typical and unique.  Last week, the Turkey stock exchange was halted.  This event had a bit of a lag based on the sliding Turkish Lira and the increasing loss of confidence of the markets.   This particularly accelerated during a recent speach in which President Erdogan vowed not to raise interest rates for religious reasons.  This was a new wrinkle to his supposed belief that raising interest rates increases inflation.  Both reasons were political in nature towards his voter base.

Inflation offically was in the low 20%, but unofficial it was closer to 60%.  With prices going up continuously, President Erdogan had announced a 50% raise in the minimum wage.  This policy was designed at placading his voter base.

Today, President Erdogan announced that the goverment would gaurantee Turkish Lira deposits in USD terms fully.  That is if they were deposited and held for one-year.  Alternative the guarantee would be half the difference between TYL and USD if held for 6 months.  In short, he dollarized the currency.

This move has political benefits for President Erdogan.  First, subsituting the USD for TYL would bring price stability and lower interest costs plus inflation in the short-term.  Remember elections are only a couple of years away in 2023.   In addition, by anchoring the TYL to the USD, he can keeep his promise of not raising interest rates (his theory and religious reasons now).  When the US FED raises rates next year, Turkish rates will also rise.  Thus, he is able to do the right policy and at the same time save face.

Thus for the short and medium term, the Turkish economy will stabize due to dollarlization and this will result in growth next year.  Assuming the mood in the country improves, President Erdogan will then be in a better position to call early elections.

Investment Thesis:  buy the turkish ETF – TUR.   It is at its lowest point and I would expect it to be a good investment for the short to medium term (1 to 2 years).