Ahh yes, the $64,000 question (or 340,000 lira question) on everyone's minds, how low will the lira go? Followed immediately by the more important question, why is it at this level? The first question is a fool's errand. The reason there are no major long-standing hedge funds that trade currencies is that currency markets are very efficient and very deep. This means there's little opportunity to make alpha, or beat the market. The article I site most often in this context is "Overconfidence in Currency Markets," by Oberlechner and Osier. In short, no one knows or can know what's going to happen to a currency although nearly everyone thinks they know. Regardless of a country's interest rates or growth numbers, there's a more fundamental harbinger of the fate of a currency. The more important question which will help answer our main issue is, is the Turkish lira intrinsically valuable?
Okay, let's start off with an easy question. Is Turkey a country you'd like to live in? I live in Turkey as it is and thus the answer for me is simple, yes. What if I didn't live in Turkey? I've visited nearly every European country, 49 U.S. states, and another 20-30 countries at this point on my journey to visit all of them, and there are many which I would say are impossible to live in. Turkey is not one of those countries. Great weather, good access to water, arable land, low crime, good infrastructure, positive demographics, a high standard of living and a hospitable people make Turkey livable. This is one of the most important metrics for a currency, what can I buy with this currency? In Turkey, you can buy land and property with liras. This is why Turkey's livability is so important in this discussion. The tomatoes in the field require energy to be transported, denominated in foreign currencies, for example, but the abundance of agriculture in the country makes the country livable and in turn helps to make the lira valuable. This livability is what I call the "Turkey put," as investors know they will be able to exchange their liras, ultimately, for something of value.
This is not the case for many other countries in the world. If the UAE didn't have billions in oil wealth would you want to visit or even live there? Mostly dessert, the country would be very difficult to live in permanently if it weren't for the things that wealth provides. I'm talking about air conditioning, good infrastructure, access to water, imported foods, bustling shopping centers and so forth. Turkey doesn't need those things to be livable although it too has many of the same luxuries. People with money come to Turkey for its natural beauty. This cannot be said of most other countries.
I was in Venezuela last year. A beautiful country undoubtedly but like the UAE it would be difficult to live in. Mountainous and very hot and humid, its oil riches made it livable in the past. An economic collapse due to economic mismanagement has spurred crime so much so that the streets are nearly completely vacant in the city centers at night. This makes living in Venezuela difficult. Those with money no longer live there and have largely left the country. This has made its currency nearly worthless.
So the question is, do you think Turkey is relatively livable? For me the answer is yes. The more livable and attractive Turkey becomes to the outside world the more demand there will be for things Turkish. London is home to trillions of wealth from all over the world because the rich choose to live there. An efficient legal system, relatively transparent applications of laws, tolerable weather, a very open society with vast freedoms, cheap labor, low taxes and proximity to other countries make the UK livable. This is why the pound sterling, although at current lows against the Euro, will not face major obstacles even if a nightmare Brexit scenario occurs.
As long as Turkey continues to remain very livable with a stable political and economic outlook and personal freedoms, the lira will ultimately rebound. It may go lower from here but the doomsday scenarios being painted by others ignore the "Turkey put" that exists because of its livability. My recommendations in making it more livable would be an overhauling of the criminal justice system to increase efficiency and speed and better communication between the government and financial markets. This recent devaluation of the currency began with the apparent miscommunication between governments as to the fate of a Turkish government bank employee imprisoned in the US and a pastor in Turkey the Turkish government accuses of terror ties. Both sides have valid points and politics was a major factor in the United States exaggerating its response, but Turkey also could have managed the crisis better. The Turkish lira won't collapse as long as it has value and this value is marketed correctly.
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