Turkey: Sustaining the unsustainable
Akbank shakes off the bonds of history
Korfez changes ahead of tough times
The strength of the Turkish lira lies in its weakness. At T-bill auctions held twice-monthly the treasury gives whatever interest the market sees fit to ask for. And the central bank continually devalues the lira just below the rate of inflation to prevent the dollar from becoming an attractive investment alternative to the lira.
Although interest from foreign-currency deposits is high, it is nowhere near as high as the yield from treasury bills. Investors (banks being amongst the biggest) are therefore more than willing to sell their dollars to convert them into Turkish lira. This has allowed the central bank to maintain a healthy foreign-reserve position. The treasury does not have to fear a foreign-currency famine, even if exports taper off and overseas foreign-currency availability declines.
But monetary and fiscal policy has become trapped within the narrow confines of this mechanism (flexibility in interest and foreign exchange rates). There are also other factors at play, such as the fact that Turkish companies are not as highly leveraged as their Asian or Latin American peers. But it is nevertheless this policy that has allowed Turkey to remain afloat in waters where Asian economies capsized.