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What should you learn from the Turkish lira crisis?

by , 08 December 2021
What should you learn from the Turkish lira crisis?
In Ernest Hemingway's 1926 novel “The Sun Also Rises” two characters are discussing bankruptcy:

“How did you go bankrupt?” Bill asked.

“Two ways” Mike said, “gradually and then suddenly”.

The “slowly at first, and then all at once” concept is wonderfully described in Malcom Gladwell's debut book The Tipping Point. Gladwell defines this idea as “the moment of critical mass, the threshold, the boiling point”.

I'm talking about that rollercoaster moment, as a rickety train car chugs slowly toward the apex of the track, before plunging and screaming lower into the abyss.

Almost exactly what's happening in Turkey right now…
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So why should we care what happens in Turkey?
 
 
In the last few weeks, the value of Turkish money has been destroyed. Turkish spending power evaporated, personal savings have been decimated, and
 
Turkish lives have been forever altered for the worse. But it’s not something that has happened instantly. The signs of crisis have been bubbling under the surface for a while.
 
Economic crises often display a similar pattern. This Turkish currency crisis is no different. It happened slowly at first. There was a gradual descent, followed by what seems to be a sudden collapse.
 
And while we sit in South Africa looking at our own shambolic economy, you should not waste the free lesson Turkey is offering you.
 
The Turkish economy is rather comparable to our own. In terms of total GDP,
Turkey is roughly twice as large as SA, but they also have about 50% more people so, on a per capita basis, the two countries are more similar than you might think.
 
We also share a similar GDP breakdown, with both economies being dominated by the services sector. In both countries services sit at roughly two thirds of total GDP. Perhaps this similarity is one of the reasons the rand is often surprisingly affected by Turkish news events. And even though there is no direct logical link between the two countries and a market moving event, the currency pairs often move in tandem.
 
Like the South African rand, the Turkish lira has weakened steadily over time – with some periods of relative strength. However, this trend started to accelerate in the last few years. The last few months can only be described as a total and utter collapse.
 
From August 2016 to August 2021, the lira went from about 3 lira/USD to just over 8 lira/USD. It’s weakened by about 20% per year.
 
Since August it has weakened to over 13 lira/USD. That’s an annualised rate of depreciation of over 200% per year.
 
To put it in perspective, it would be like the rand going from R15/USD today to R70/USD by 2026. Imagine what that would do to the economy, your ability to buy imported goods and your local currency-based savings.
 
So, what was the reason for the dramatic shift in Turkey. I could point to specific actions taken by the Turkish authorities, such as dropping interest rates by 4% down to 15%, but really it has been as a result of multiple years of economic mismanagement. No single item brought Turkey to the brink. And blaming the final straw that broke the camel's back, is to lose sight of the context.
 
What lesson should South Africans take from Turkey?
 
Well, the obvious answer is not to pursue foolhardy economic policies because markets will eventually punish the country for mismanagement.
 
Unfortunately, very few of us are standing at the tiller of the South African economic ship. And all that you can do is look at your own finances and plan as best you can. Fortunately, South Africans still have a large degree of autonomy when it comes to managing their personal wealth. We are still a free country after all, despite sometimes being locked in our houses by the government that has been operating under a State of Disaster for 628 days.
 
So, when you spot a trend, like a weakening currency, it seems like listening to what the market is telling you is a good idea. Many Turks saw the writing on the wall years before the present collapse and acted.
 
Others might have seen the currency move from 3 lira/USD to 4 lira/USD and then waited for a bit of strength. Maybe they were hoping for a move back to 3.8 lira/USD before moving money offshore.
 
From the perspective of 13 lira/USD the decision to wait now looks very, very silly.
 
The writing is on the wall in South Africa. This week we saw that our unemployment rate (by the expanded definition) is up to 44.4% of the labour force. Almost half our population survives thanks to grants and support from the other half. Our gap between rich and poor is off the charts and worst of all current policy is doing absolutely nothing useful to reverse this trend.
 
So, if you are thinking of moving some money out of SA, my view is don't wait too long.
 
Your annual R1 million-limit is going to expire on the 31st of December 2021. If you don’t use it, you will lose it.
 
So, to help soften the pain of the slightly weaker FX rates today. Rand Swiss is offering you a discount of 50% for all offshore transfers done by Money Morning readers before the 31st of December 2021. All you have to do to claim your discount is use the code SUMMER MADNESS when requesting your transfer.
 
If you haven’t yet done a transfer with Rand Swiss, all you need to do is send an email to support@randswiss.com with your name and phone number and one of our currency dealers will contact you to assist with your transfer.
 
So, don’t lose hope, while this piece might have been a little sombre, there are plenty of Turkish citizens that did move currency out at 3 lira, 4 lira and 5 lira to the USD that now enjoy a vastly better lifestyle thanks to their ability to buy local goods and services at a fraction of the price!
 
Make sure you’re in that position when South Africa reaches its tipping point.
 
 
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What should you learn from the Turkish lira crisis?
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