By Ashish Advani For years, Turkey has been an odd in-between country – traditionally the bridge between Europe and Asia for trading, traveling, etc. The Turkish lira itself has been an interesting currency play for Forex traders in the past.

But of course, that all changed with the global recession. Like most emerging market nations, the Turkish economy has been struggling ever since. That’s leading many Forex traders to wonder if the Turkish lira is even worth trading anymore.

However, I’m starting to see some signs of promise in the Turkish economy. In fact, I’m cautiously bullish on the Turkish lira at this point. I believe this area of the world holds significant possibilities and the Turkish lira is just one of several currencies that look to benefit.

Why do I say that? Well, first of all, Turkey seems to be weathering the storm reasonably well. The country may actually come out stronger at the other end of this recession.

At this point, everyone has already accepted that the global credit crunch fallout has hit Turkey rather significantly. Indeed, the economy is expected to decline by 4-5% in 2009, which is higher than previously estimated (2% by the World Bank).

But still I see some promise hiding there. Right now, exports are down but so are imports. In other words, they’re not selling as much, but they’re not buying either. That gives Turkey a subtle edge.

Specifically, the reduction in oil prices from $100 a barrel down to $60 has put a huge dent in their imports. In fact, Turkey will save $16 billion in the import bill for 2009 just because of cheaper oil.

Turkey Uses the Recession to Pay Off Their Debts

Lower exports and imports are critical to improving Turkey’s balance of payments and trade deficit.

From its peak of a deficit of $49 billion back in August 2008 the deficit has plummeted to around $27 billion in April 2009. This lower deficit has helped the country roll over its debt obligations as they come due.

Given its neighbors in the region, Turkey seems to have created a great track record for easily refinancing its debt. Just the fact that Turkey can refinance debt has been a huge confidence booster for the country.

The lower trade deficit has also helped reduce pressure on the foreign exchange rate. That’s kept the Turkish Lira rather stable since the initial decline back in August - November period. (Recall, the dollar was on a rampage during that time period, and all currencies declined against the dollar worldwide with or without merit.)

It Does NOT Look Like Turkey Will Accept Handouts This Summer

The recent debate in the country has been around the on-going discussion that Turkey is having with the IMF (International monetary Fund). There is a heated debate on whether Turkey should accept new FCL (Flexible Credit Line) facility from the IMF.

Of course, the IMF won’t offer a flexible credit line without strings attached. If Turkey accepted, there would be regular stringent reviews of the line of credit. That could hamper Turkey’s growth and flexibility in the future.

However, right now it’s so easy to rollover Turkey’s external debt liability that officials are debating whether the benefits of such a new line are really worth it. The May 2008 facility is still working and there seems to be no rush for the country to enter into a new facility.

A Central Bank In Control…

Finally, I’m looking at Turkey because of the country’s prudent central bank.

The Turkish central bank seems to be very comfortable with inflation in the country as well as the current FX prices in the market.

Unlike some other central banks around the world, the central bank has some room to breathe. They have several inflation-fighting arrows left in their quiver including regular U.S. dollar auctions. They can also directly intervene in the market if necessary.

So I doubt the central bank will do anything to weaken the Turkish lira anytime soon.

All things considered, I am cautiously optimistic on Turkey’s economy. I expect the country to come out of this recession much stronger than what the current situation is. I’m also bullish on the Turkish lira. I expect the lira to strengthen somewhat slowly but steadily in the coming months at least till October of this year.

In October, the IMF will hold its annual general meeting in Turkey and may sign the new FCL around then. And depending on which side wins the agreement terms, we can continue to build our views on Turkey, or reverse course then.

Yours in FX Profits,
Ashish Advani

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