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Why was Turkey differentiated from other developing countries? 25/08/2011 - Viewed 4780 times

Recently, a remarkable dynamism has been observed in Turkey in parallel with the trend in global markets. Exchange rate and stock market movements became the top agenda items of the economy. However, a closer look at the data suggests that the trend that carried the foreign exchange (FX) basket (0.5 Dollar and 0.5 Euro) from 1.68 to 2.18 actually emerged in November 2010 (Figure 1).

Figure 1. Change in exchange rate

Source: Central Bank of Turkey

In the mentioned period, the Turkish lira (Lira) depreciated by 25 percent against Euro and by 29 percent against Dollar. The depreciation of the Lira against Dollar was the severest compared to the currencies of 17 developing countries studied. In the examined period, the currencies of five other countries depreciated, too. However, Argentinean peso, the second highest-depreciated currency after the Lira, lost value against dollar only by 8 percent. In this period, currencies of 12 developing countries appreciated. With this perspective, Turkey differed substantially from other developing countries with respect to exchange rate movements (Table 1).

This trend was not limited to exchange rate. In the examined period, Turkey differentiated considerably from other countries also in terms of the movements in the stock market. In the period between November 1, 2010 and August, 19 2011, Istanbul Stock Exchange (IMKB) lost value by 38.6 percent in Dollar terms. With the effect of the turbulence in markets observed in the last month, 15 out of 18 countries witnessed a loss in stock value in Dollar terms. Nevertheless, the magnitude was much limited than that in Turkey. Even in India, the country which faced the second largest loss following Turkey, the mentioned ratio was 22.9 percent. The average rate of loss in 17 developed countries analyzed in this study was 10 percent. With this regard, it will not be too assertive to state that Turkey differentiated remarkably from other developing countries (Table 1).

Table 1. Exchange rate and stock market performances of developing countries[1]

Source: Bloomberg and Pacific Exchange Rate Services

When the performances are examined over two sub-periods, it is seen that the differentiation of Turkey's performance became more visible in the first sub-period between November 1, 2010 and July 22, 2011. Over this period, the Lira depreciated by 18.7 percent against Dollar and the Turkish stock index in Dollar terms lost value by 27 percent.

After July 22, when the turmoil in markets began, a similar currency depreciation and stock devaluation in dollar terms was observed in all developing countries while Malaysia, Indonesia and China were the least-affected countries.

What does the differentiation stem from?

As can be seen, Turkey has been differentiating substantially from other developing countries in terms of exchange rate and stock movement since the beginning of November 2010. This proves that the behavior of international fund inflows towards Turkey also differentiated remarkably. This trend which was more striking particularly before July 22 might be driven by several factors.

The first possible factor is the comprehensive changes in the monetary policy framework the Central Bank introduced with the Monetary Policy Committee decision dated November 11, 2010. The second one might be the confusion stemming from the Central Bank's failure to express to the markets the motivation of the change in the monetary policy. The third possible reason is that the rising current account deficit risk has become more visible. In this period, the announcement of the IMF's evaluation reports on Turkey was suspended and rumors about this action spread, which can be the fourth reason for the above mentioned trend. All or some of these factors, or other dynamics which could not be foreseen hereby, might have caused this differentiation. We are yet to see whether these developments will prove favorable for the general equilibrium.

[1] Positive (negative) change in the Dollar exchange rate indicates that the currency of the country in question depreciated (appreciated).

Sarp Kalkan, TEPAV Economic Policy Analyst http://www.tepav.org.tr/en/ekibimiz/s/1034/Sarp+Kalkan