It’s been a humbling 12 months for the Turkish lira.
On the one-year anniversary of the country’s failed coup, the lira ranks as the world’s worst performing currency outside the frontier markets since July 15 last year.
The currency has depreciated just under 20 per cent against the dollar since tanks rolled onto the streets of Istanbul in a botched coup attempt which has been followed by a widespread purge of government opponents and a major constitutional change to cement the power of the president, transforming Turkish parliamentary democracy.
Having dumped the currency on fears over political instability in the aftermath of the coup, investor attention has quickly turned to the quality of Turkey’s democratic institutions.
In April, Turkey’s strongman president Recep Tayyip Erdogan, narrowly won a referendum that will pave the way for sweeping executive powers in his office.
The new constitution will allow the president to stay in power until 2029, meaning Mr Erdogan will have ruled the country longer than the republic’s founder, Mustafa Kemal Ataturk.
The precipitous fall in the lira has also driven up inflation to nine-year highs and forced the central bank to begin tightening rates in November last year.
The economy however is back on the up. Having suffered a quarterly contraction in the months after the coup attempt, GDP growth has rebounded strongly in the following two quarters. Growth hit 5 per cent on a year on year measure in the three months to March.
That’s helped ease the pressure on the central bank, which has held steady on any rate changes since April. A pickup in growth has also turbo-charged Turkey’s stock market. Istanbul’s benchmark BIST 100 index has gained 33 per cent so far this year and is up 45 per cent since the coup.
Equity investors will have been cheered by the government’s measures to support the economy. Ankara has turned on the fiscal taps since the coup, while unemployment has also edged down.
But higher government spending poses risks.
“The country’s fiscal performance, while the resulting credit boom has led to a sizeable debt buildup in the corporate sector, increasing its exposure to external shocks and risking trouble down the road”, warn analysts at Focus Economics.
The outlook for the lira is also unclear. While the currency has managed to wipe out most of its 2017 losses in the last month, Turkey’s volatile security situation, febrile relations with the EU, and institutional checks and balances will continue to weigh on markets.
The lira is trading flat at publication time to TRY3.5665 against the dollar.