Currency crisis: Turkey in 2021

Abstract

Research methodology This case study is developed from secondary sources. Two types of data were used to develop this case. The statistical data are gathered from sources such as Yahoo! Finance, Trading Economics, Investing.com and The Central Bank of the Republic of Turkey. Reports on market developments are gathered from major news outlets such as Bloomberg, The Wall Street Journal and Reuters. Case overview/synopsis The year 2021 was a volatile year for the Turkish economy: it ended the year with 36% annual inflation, 44% currency devaluation, shortages of basic goods, street protests, etc. How does the Turkish currency crisis in 2021 play out in various financial markets such as the foreign exchange, bond, stock and cryptocurrency markets? This case study introduces students to Turkey’s economic crisis in 2021 and how the Turkish lira’s depreciation, home inflation and central bank policies interact to affect its various financial markets. In the bond market, a depreciated lira heightened the credit risk of Turkey’s bond issuers and effectively crippled the country’s bond market. In contrast, Turkey’s stock and cryptocurrency markets experienced a rally as Turks put their money into equities and cryptocurrencies to hedge against inflation. In international trade, the lira’s fall and the supply chain disruptions in Asia benefited Turkish exporters tremendously. In contrast, Turkish importers suffered. In the Turkish society, the impact of the currency and inflation crisis fell the hardest on ordinary folks, who saw the values of their wages and pension benefits erode. In times of hardship, socially responsible citizens helped the poor by anonymously paying for others’ unpaid bills. Complexity academic level Given the multicomplexity of a currency crisis, this case would be valuable for finance/economics students to understand how a country’s currency crisis and its central bank policies interact to impact its various financial markets. This case is appropriate for courses in Markets and Institutions with a global or cultural learning objective. Learning Objectives 1. Describe how the Turkish lira’s depreciation affected its various financial markets, such as foreign exchange, bond, stock and cryptocurrency markets.2. Understand the cultural perspective on usury, how it exists in modern-day finance, and its’ role in President Recep Tayyip Erdoğan’s economic policy.3. Compare and contrast Turkey’s export and import industries and how they are being affected by the lira’s depreciation.4. Evaluate the risk exposure of foreign investors who participate in Turkey’s stock market given a depreciating lira.5. Evaluate the creditworthiness of Turkish corporations who issued dollar- or euro-denominated bonds as well as issuers of lira-denominated bonds given a depreciating lira.6. Understand the social impacts of a currency crisis and the charitable acts of socially responsible citizens.