Term Paper

Submitted to
Professor Wen-Lin Wu
Lecture on INTERNATIONAL FINANCIAL MARKETS AND INVESTMENT

Submitted by

ALWIN 林眾友 D0361279

VIVIEN 潘詠滿 D0525923
JUAN 許金水 D0628800
KRISTINE 楊莉媞 D0637983
SANDY 王怡晴 D0637881

Submission date:

Table of Content
 A. The Selected Country (Turkey)

1. General Introduction
Turkey is a nation straddling eastern Europe and western Asia with cultural
connections to ancient Greek, Persian, Roman, Byzantine and Ottoman empires.
Cosmopolitan Istanbul, on the Bosphorus Strait, is home to the iconic Hagia
Sophia, with its soaring dome and Christian mosaics, the massive 17th-century
Blue Mosque and the circa-1460 Topkapı Palace, former home of sultans. Ankara
is Turkey’s modern capital.

2. Economic Introduction

The economy of Turkey is defined as an emerging market economy by the IMF.

Turkey is among the world's developed countries according to the CIA World
Factbook. Turkey is also defined by economists and political scientists as one of
the world's newly industrialized countries.

3. Economic Data

Currency : Turkish lira

Gross domestic product : 851.1 billion USD (2017)
GDP per capita : 10,540.62 USD (2017)
Minimum wage : 422.26 EUR per month (Jan 2019)
Unemployment rate : 12.7% (Dec 2018)
GDP growth rate : 7.4% annual change (2017)
GNI per capita : 27,550 PPP dollars (2017)

B. Annual Financial Account, 10-year Bond Yield, and Exchange

Rate Relation

In this part, data shown are the Turkey’s financial account data, 10-year
Bond Yield data, and Exchange Rate data taken from year 2000 until 2018.
 Then, there will be three charts which show the relationship between those
variables.

1. Relationship between financial account and 10-year bond yield chart

Chart A: Relationship between financial account and 10-year bond yield

20000 14
10000
12
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
-10000 10

-20000
8
-30000
6
-40000
-50000 4
-60000
2
-70000
-80000 0
TK BOP: FINANCIAL ACCOUNT CURN TR TURKEY GVT BMK BID YLD 10Y (TL) - RED. YIELD

From the graph given, we can see roughly positive relationship between
financial account and 10-year bond yield in 2010 until 2013 and 2013 until
2014. When the financial account line was declining in 2010 until 2013, the
10-year bond yield was declining too. Even though the relation was not
perfectly harmonious, but the graph shows us that both of them are
declining. In the other hand, both of them were inclining in 2013 until 2014.
However, there is interesting fact in year 2016 until 2017. In those year, the
two variables moved in an opposite direction. The 10-year bond yield was
declining, but the financial account was inclining. Nevertheless, this trend
lasted for a year only, it didn’t last long. In 2017 until 2018, those two
variables moved in the same way again as usual. In conclusion, it is
concluded that financial account leads to a movement in bond yield in a
 generally positive relationship. The relationship between financial account
and 10-year bond yield is considered as correlated because the correlation
coefficient shows a high number (0.550447338) compared to other variables’
correlation coefficient.

2. Relationship between financial account and exchange rate chart

The graph shows a messy pattern. In 2003 until 2005, there is an extreme
declining in financial account line, but there is only a small declining in
exchange rate. Furthermore, it’s an interesting fact that in 2005 until 2008,
there were three times trend changing, and each of the trend showed
opposite move direction between financial account line and exchange rate
line. Those years after 2008 were more hectic, when the financial account
line went down to its lowest point which was below -70000, the exchange
rate surprisingly went up. The same things happened in 2016 until 2017,
 when the financial account line dropped, the exchange rate rose up. In the
conclusion, financial account and exchange rate are not highly correlated. It
is proven by the very low correlation coefficient, which is 0.104185663.

3. Relationship between 10-year bond yield and exchange rate chart

In the beginning, in year 2011 until 2013, the graph shows opposite moving
direction between exchange rate and 10-year bond yield. When the 10-year
bond yield moved to its lowest point in 10-year range, the exchange rate just
went up constantly. But the graph shows harmonious moving direction in
year 2013 until 2014, 2015 until 2016, and also 2016 until 2018. The
relation between exchange rate and 10-year bond yield is considered as
correlated, given the correlation coefficient which is high enough compared
to others is 0.533169825.
 C. Percentage Changes of The Three Variables (Financial Account,
10-year Bond Yield, and Exchange Rate)

The formula used is :

The data given below are the percentage changes of the three variables
annually from one year to another year (2000 to 2001, 2001 to 2002, etc.)

1. Exchange Rate

Percentage change of Exchange Rate from year 2000 - 2018.

2000-2001 0.859825

2001-2002 0.180018

2002-2003 0.168221

2003-2004 -0.09419

2004-2005 -0.02115

2005-2006 -0.04861

2006-2007 0.033497

2007-2008 -0.06449

2008-2009 0.247416

2009-2010 -0.06798

2010-2011 0.023066

2011-2012 0.157851

2012-2013 0.019614

2013-2014 0.18063
2014-2015 0.263413

2015-2016 0.04454

2016-2017 0.271785

2017-2018 0.143932

2. 10-year Bond Yield

Percentage change in 10-year bond yield from year 2010 until 2018

2010-2011 -0.12861

2011-2012 -0.00963

2012-2013 -0.33369

2013-2014 0.487844

2014-2015 -0.00436

2015-2016 -0.01094

2016-2017 0.131637

2017-2018 0.196481

3. Financial Account

Percentage change in financial account from year 2000-2018

2000-2001 -2.69583

2001-2002 -1.08051

2002-2003 5.110922

2003-2004 1.471656
2004-2005 1.411309

2005-2006 9.37E-05

2006-2007 0.15456

2007-2008 -0.29472

2008-2009 -0.71578

2009-2010 5.08313

2010-2011 0.117257

2011-2012 0.082209

2012-2013 0.010927

2013-2014 -0.41883

2014-2015 -0.74605

2015-2016 1.105239

2016-2017 0.687141

2017-2018 -1.0945

D. Descriptive Statistics, Including Average, Standard Deviation,

Kurtosis, Skewness, and Correlation Coefficient
To know more about the relation between those three variables, here is the
data of average, standard deviation, kurtosis, skewness, and even the
correlation coefficient between those variables which express the level of
correlation between those variables (whether or not it is highly correlated).
Below is the descriptive statistics of those three variables: exchange rate, 10-
year bond yield, and financial account.

Descriptive Statistics
 NEW TR TURKEY TK BOP:
TURKISH GVT BMK FINANCIAL
LIRA TO BID YLD ACCOUNT
US $ 10Y (TL) - CURN
(WMR) - RED. YIELD
EXCHANG
E RATE
Mean 1.830487368 9.482222222 -30735.03253
Standard 0.197904714 0.54215562 6126.713026
Error
Median 1.51915 9.26 -34761
Standard 0.862646647 1.626466859 26705.72293
Deviation
Sample 0.744159237 2.645394444 713195637.5
Variance
Kurtosis 1.74524095 2.35645244 -1.070398424
Skewness 1.438327424 -0.491951478 -0.112035818
Range 3.45444 6.07 88017
Minimum 0.61081 6.17 -73460
Maximum 4.06525 12.24 14557

Correlation Coefficient

Exchange 10-year bond Financial

Rate yield account
Exchange 1
Rate
 10-year bond 0.533169825 1
yield
Financial 0.104185663 0.550447338 1
account

1. Exchange Rate
NEW TURKISH LIRA TO US $ (WMR) - EXCHANGE RATE

Mean 1.830487368
Standard Error 0.197904714
Median 1.51915
Mode #N/A
Standard Deviation 0.862646647
Sample Variance 0.744159237
Kurtosis 1.74524095
Skewness 1.438327424
Range 3.45444
Minimum 0.61081
Maximum 4.06525
Sum 34.77926
Count 19

Correlation coefficient between financial account and exchange rate (2000-

2018) : 0.104185663

Correlation coefficient between financial account and 10-year bond yield

(2010-2018) : 0.550447338
 2. 10-year bond yield
TR TURKEY GVT BMK BID YLD 10Y (TL) - RED.
YIELD

Mean 9.482222222
Standard Error 0.54215562
Median 9.26
Mode #N/A
Standard Deviation 1.626466859
Sample Variance 2.645394444
Kurtosis 2.35645244
Skewness -0.491951478
Range 6.07
Minimum 6.17
Maximum 12.24
Sum 85.34
Count 9

Correlation coefficient between 10-year bond yield and exchange rate (2010-
2018) : 0.533169825

Correlation coefficient between 10-year bond yield and financial account

(2010-2018) : 0.550447338
 3. Financial account
TK BOP: FINANCIAL ACCOUNT CURN

Mean -30735.03253
Standard Error 6126.713026
Median -34761
Mode #N/A
Standard Deviation 26705.72293
Sample Variance 713195637.5
Kurtosis -1.070398424
Skewness -0.112035818
Range 88017
Minimum -73460
Maximum 14557
Sum -583965.618
Count 19

Correlation coefficient between financial account and exchange rate (2000-

2018) : 0.104185663

Correlation coefficient between financial account and 10-year bond yield

(2010-2018) : 0.550447338
 from 2015/1/1 to 2018/12/31
Frequency: daily

Event:
2016 Jul.
15. A coup attempt happened in July 15 by some members of the nation’s military. It started with
tanks rolling onto the streets in the capital city, Ankara. The stock market in Turkey sold off
following the coup attempt, reflecting the massive uncertainty now facing the nation. On this day
the BIST-100 closed at 82,825, and the index fell to 71,594.94 on July 221, a 14% loss in a week.

2017 Oct.
9. On October 8, the U.S government decided to suspend the processing of most new visas in
Turkey after the arrest of a consulate employee. This decision not only made the lira dropped 3.4
percent and stood at 3.7385 against the dollar, but also made the BIST-100 fell to 101,298, which
is a 2.73 percent loss than yesterday.

2018 April
5. Lira fell sharply to 4.0443 after reports that Prime Minister Mehmet Simsek had resigned
after an angry telephone call with Erdogan over interest rate policy.

2018 May
14. The president of Turkey, Erdogan, announced that he planned to take more monetary control.
Since then, the lira had depreciated 9.9% against the U.S dollar.

2018 June
7. Turkey’s central bank raised its benchmark rate by 125 basis points to 17.75 percent, the lira
firmed to 4.4516 against the dollar following the decision, from 4.5799 directly before. In
addition, Turkey’s main stock index, BIST-100 hit the lowest in historical for 96657.69 on June
6, it recovered at the end of this day for 98623.63.

2018 August
1. The US government announced the imposition of economic sanctions on two Turkish cabinet
ministers for their roles in the arrest in their country of US Protestant pastor Andrew Brunson.
Which made the exchange rate of Lira to US dollar plunged more severe.

10. The US president, Donald Trump declared that the aluminium tariffs with respect to Turkey
would be raised to 20% and the steel tariffs to 50%. This announcement led to the lira lost
around 20% of its value. Also, it had already fallen more than 40% in the past year.

13. Yesterday, the Central Bank of the Republic of Turkey (CBRT) pledged to provide the
liquidity the bank’s need. The Central Bank also raised foreign exchange deposit limits for lira
transactions of lenders from €7.2 billion to €20 billion. However, this day the exchange rate fell
around 9% to 7.2 Lira against to dollar, and it is the historical lowest exchange rate. Moreover,
the recovery from 7.2 to 6.9 when the president of Turkey followed the central bank’s comments
with a claim the US was trying to stab Turkey in the back.
In addition, the Turkish stock market lost 3.5%, with some bank stocks suffering double-digit
losses.

2018. September
13. the Central Bank of Republic of Turkey (CBRT) decided to raise the interest rate to 24%,
quickly pushed the Turkish lira up 3 percent against the dollar. This action which defying the
president of the Turkey, Erdogan, who just commented that the central bank should lower the
interest rate.

Judgement and Analysis

I. COUNTRY CURRENT STATUS

Before we start to think to what kind of investment we should aim for and how to gain profit

from investing in a country, we should first analyze the status of the country that we are going to

invest in.

TURKEY’S REAL GDP GROWTH RATE

We decided to analyze Turkey’s real GDP growth to see the current status of Turkey’s economy.

Turkey’s real GDP Growth (1 year period)

source:
Turkey Real GDP Growth [1999 - 2019] [Data & Charts]. (n.d.). Retrieved from

https://www.ceicdata.com/en/indicator/turkey/real-gdp-growth

As we can see from the graph above, Turkey entered recession in 2018 and is currently in a

recession. Their GDP growth started going down from April 2018.

To further prove our point, we would find other datas to support our analysis that Turkey is

currently in a recession such as unemployment rates and inflation rates of Turkey which we will

uncover in the next part of the report.

Turkey’s real GDP Growth (10 year period)

source:

Turkey Real GDP Growth [1999 - 2019] [Data & Charts]. (n.d.). Retrieved from

https://www.ceicdata.com/en/indicator/turkey/real-gdp-growth

When we analyze the Turkey’s real GDP Growth rate for 10 years, we can see that Turkey’s real

GDP growth is currently at an all-time low within the last 9 years (after their last recession which

happened in 2009)
UNEMPLOYMENT RATES

Turkey’s Unemployment rate (1 year period)

Source:

Turkey Unemployment Rate. (n.d.). Retrieved from

https://tradingeconomics.com/turkey/unemployment-rate

The second data that we are going to analyze is Turkey’s unemployment rates. When a country is

in a recession, their unemployment rates would usually rise because the economy is slowing

down, people would spend less and therefore companies revenue started to drop and these

companies would respond by laying off their worker to reduce their loss.

We can see that Turkey’s unemployment has been rising from last April 2018. Based on our GDP

growth rate, we also see a decline during April 2018 which proves our theory that Turkey’s

economy has entered recession in April 2018.

Turkey’s Unemployment rate (10 year period)

Source:

Turkey Unemployment Rate. (n.d.). Retrieved from

https://tradingeconomics.com/turkey/unemployment-rate

However, when we look into the last 10 years of unemployment rate in Turkey, we noticed that

Turkey’s unemployment rate is also at an all-time high, almost to the point where the last

recession peaked.

Next, we are going to analyze Turkey’s inflation rate to figure out whether Turkey is really in a

recession or not.
INFLATION RATE

Turkey’s Inflation rate (10 year period)

Source: https://tradingeconomics.com/turkey/inflation-cpi

Whenever a country is in a recession, their inflation would usually go down. Recession means

that there are high unemployment and the total productivity of a country falls down (GDP). As

consumers have less to spend (high unemployment), the price of goods will also fall (A shift to

the left of the demand curve would cause the new equilibrium point to shift to the bottom-left

which means that the equilibrium volume of the goods will be fewer and the price would also be

lower) However, there are a few rare cases of “stagflation” where as a country is going into a

recession, their inflation rate would also go up. It may seem true for when we studied the graph

of Turkey’s GDP and unemployment rate we can see that the country is entering recession

starting from April 2018 where the inflation graph shows that the inflation is also rising. But,

starting from late 2018, the inflation is slowly coming down as can be seen from the 1 year graph

of Turkey’s inflation rate chart.

Turkey’s inflation rate (1 year period)

Source:

Turkey Inflation Rate. (n.d.). Retrieved from https://tradingeconomics.com/turkey/inflation-cpi

This data further validates our theory that Turkey is currently in a recession. However, we

decided to find out the reason behind the increase in inflation rate during the period Turkey was

entering recession in April 2018 to avoid bad indicators..

We believe that the cause of rising inflation when unemployment rises and GDP growth is going

down is because the currency pressure that Turkey Lira faces. As we can see the biggest jump in

Turkey’s inflation rate happened in August to September 2018 where Turkish Lira had a massive

depreciation in their exchange rate (which we will analyze their relation further later).

The depreciation of the currency caused the cost of importing goods to become more expensive

thus increasing the CPI which then ultimately cause the inflation rate to go up.

TURKEY LIRA TO USD CHART

Turkey Lira to USD Chart (1 year period)

Source:

XE Currency Charts: TRY to USD. (n.d.). Retrieved from https://www.xe.com/currencycharts/?

from=TRY&to=USD&view=1Y

Based on the 1 Year chart of Turkish Lira to USD within 1 year, we can see that the trend is

currently going down. There are some big drops that we have circled in the graph above and we

have connected the drop with some big news that we are going to further analyze.

● Circle 1

Source:

Editor, C. F. (2019, May 09). Turkey's Lira Crisis: How Dangerous? Retrieved from

https://impakter.com/turkeys-lira-crisis-dangerous/
There is a major free-fall in the mid August which is caused by Donald Trump’s move to double

metal tariffs on Turkey (steel from 25% to 50% and aluminum from 10% to 20%) as shown by

the graph. Between August 2018 to Feb 2019, Lira is slowly crawling back up but still unable to

reach the point before the fall. Before the fall, 1 Lira was traded at the very least for 0.2 USD but

the highest point reached within after the fall to April 2019 was 0.193 USD

● Circle 2

Source:

Gall, C. (2019, March 25). Turkey to Investigate JPMorgan Over Charges It 'Caused Volatility' in

the Markets. Retrieved from https://www.nytimes.com/2019/03/25/business/turkey-jpmorgan-

erdogan.html

Pitel, L. (2019, March 24). Erdogan slams investors as Turkey probes JPMorgan. Retrieved from

https://www.ft.com/content/79c27d9a-4e0e-11e9-9c76-bf4a0ce37d49

In March 2019, JP Morgan released an advice to short Lira because their analyst believed that the

Lira’s price would fall. However, Turkey’s president responded by blaming the analyst and said

that they are trying to “feed” investors with false information to bring the Lira down. Turkey

then responded by initiating an investigation on JP Morgan. During that day, Lira dropped 6.5%

and the central bank decided to stop lending Lira to stop investors from shorting on their

currency.

The central bank’s action caused the cost of lending Lira to soared up and investors stopped short

selling the currency which stopped the depreciation of the Lira. However, this leads to a loss of

confidence from investors mainly because:

 1. When a country leader has to issue a policy to stop investors from short-selling the

currency, usually there is something wrong with that country’s economy. If there is

nothing wrong with the economy, the country would be sure that their currency would

bounce back.

2. When investors are unable to get their money out of a country, they would think twice

about investing more money there (Liquidity problem)

3. If they have the chance, they would withdraw their invested money as soon as possible to

avoid loss.

As seen from the graph after the fall in the second circle, the Lira did bounced back but from

there it started going down until now. We believe that this is because the loss of confidence in

Turkey’s economy management.

Turkey Lira to USD Chart (10 year period)

Souce:
XE Currency Charts: TRY to USD. (n.d.). Retrieved from https://www.xe.com/currencycharts/?

from=TRY&to=USD&view=10Y

The trend of Lira has been slowly going down for the last 10 years as we can see from the graph

above.

Turkey Lira to USD Chart (1 year period) 2018

Source:

XE Currency Charts: TRY to USD. (n.d.). Retrieved from https://www.xe.com/currencycharts/?

from=TRY&to=USD&view=1Y

To prove our theory that the increase in inflation rate when Turkey’s economy is going into

recession was because of the depreciation of the currency, we decided to analyze the exchange

rate of Turkey lira to USD in 2018.

We can see that in April 2018, there is a drop in the chart (Dropped about 0.03 point). If we

compare the graph to the inflation rate chart, we can see that between April and May 2018, the

inflation rate of Turkey was also rising. We believe that the depreciation of the currency is what
caused the Turkey inflation rate to go up. Same with the inflation rate jump in August where the

currency depreciated by about 0.05 point in the above curve.

We have proven that our theory regarding Turkey is in a recession holds true. We decided that

now we should analyze how Turkey central bank set their interest rate to see what is their

responses towards the recession.

TURKEY INTEREST RATE

Turkey Interest rate chart (1 year period)

Source:

Turkey Interest Rate. (n.d.). Retrieved from https://tradingeconomics.com/turkey/interest-rate

Turkey Central Bank key rates 2018. (2019, February 10). Retrieved from

https://countryeconomy.com/key-rates/turkey

Based on the above chart, we can see that the interest rate started at 8%. In June 1 2018 they

raised their interest rate to 16.5%. Then, they raised the interest rate again in June 8 2018 to

17.75% and in September 2018 they raised the interest rate to 24% and it is still unchanged as of

today (May 8 2019)

In September 2018, Turkey’s central bank decided to set their interest rate at 24% to tempt

investors to invest their money in Turkey. This strategy was primarily used to fight the pressure

against Turkish Lira from foreign countries. (A high interest rate would shift the demand curve to

the right because people who see a high interest rate would be more appealed to invest their

money in that country which will then cause the equilibrium price to shift to the top-right and

cause the equilibrium price to be higher and more volume of Lira being traded) Turkey decided

to keep their interest rate at 24% until May 2019 even when the country is in a recession.

Their strategy to hold the interest rate at 24% is aimed to stabilize the inflation level and they

stated that they will maintain high rates until their inflation displayed “significant improvement”

As interest rates go up, people would be less willing to borrow money from the bank and more

willing to save their money, this leads to a decrease in their purchasing power and slowing down

the economy which will ultimately cause the inflation rate to go down.

Their strategy worked and as we can see from the inflation rate graph above, after this policy was

applied, Turkey’s inflation rate started to go down. We think that Turkey’s plan is to stabilize

their inflation rate and once their inflation rate reached their desired point, they would cut the

interest rate to invite investors to start investing henceforth restarting the economy back.

INFLATION RATE - INTEREST RATE RELATIONSHIP

Turkey’s strategy to set their interest rate high help repair their inflation level. Based on the news

article that we have provided, we can see that the inflation level in 2019 is below the predicted

inflation level (The inflation rate in April 2019 was 19.5% while the predicted inflation level was

20.25%). This inflation data shows that there are some positive changes in the Turkey economy.
On the article, it is also said that Turkey predicted their inflation rate to go down to 16.13% at the

end of 2019. However, Turkey currently has a really high inflation rate compared to other

countries in the world, (U.S Inflation rate as of March 2019 is 1.9%). Usually, a country target

inflation rate is somewhere between 2% to 5% and as we can see from Turkey’s example that

their inflation rate is way off the target inflation rate which is bad for the economy. (Even

Indonesia and South Africa’s inflation rate currently are in the range of 5% to 6% for South

Africa and 2% to 3% for Indonesia)

When a country is in a recession, everything is cheap. Their currency proved to be very cheap

compared to a few years before and their country’s interest rate should be low to stimulate the

economy (to attract investors to borrow money to start business which will help improve the

economy and finally bring the country out of the recession). In this case however, Turkey still

held their interest rate high to fight off their inflation problem and also to fight the pressure on

their currency.

To summarize our analysis regarding Turkey’s current condition, our theory based on the data we

have analyzed so far are:

1. Turkey is currently in the middle of a recession but their interest rates is still at a high

level mainly to fight the inflation and pressure on their currency.

2. Unemployment rates is at their highest within 9 years and GDP growth rate is at its

lowest within 9 years.

3. Inflation rate is slowly going down but currently it is still quite high compared to

Turkey’s inflation rate within 10 years.

 II. PREDICTIONS FOR THE FORESEEABLE FUTURE

As an investor, when a country is in a recession, it opens a chance to take profit because

everything is cheap. However, we must be careful because if we are going to invest during

recession times, a few key points that we should be aware of are:

1. We need to have the confidence that the country has the ability to bounce back out of the

recession

If the country is going down and they don’t have the power to end their recession, it

might endanger our investment. Investors would usually aim for the lowest investment

price and start making investment there once the price is low enough or there are some

regulations change that tempts investors to start investing in that country. But, if a

country has a lot of political problem, investors might be spooked to invest in that

country therefore leaving the country in continuous downslide.

2. How long will the recession last

Average recession last about 1.5 years. If we start investing too soon on the recession, we

might get a higher price than the price we can get if we wait for a little longer.

3. When will the trough of the country’s business cycle happen

A trough is a low turning point or a local minimum of a business cycle. If we set a long

position when the business cycle is on its trough, we can gain a lot of profit when the

business comes back up. Therefore, it is important to keep a close attention to a business

that is currently in a recession.

We already know that Turkey is currently holding their interest rate at 24% even when their

economy is entering a recession. As long as they are putting their interest rate at that point,

investors would think twice about borrowing money and would lean towards saving their money
there. This would cause the demand curve to shift to the right because people wants to save their

money in Turkey’s bank due to the high interest rate. The new equilibrium would be at a higher

price and at a higher quantity meaning that the currency should be appreciating. However, a lot

of factors may also affect on whether a currency is appreciating or depreciating. For example, the

stability of economic and politics of the country and investors confidence in the country that we

will discuss in the next part of this report.

Another point that we have to consider is that the Turkey’s action holding their interest rate at

24% could backfire to them in the long run. We have learned that the unemployment rate for

Turkey is currently at the highest point within the last 9 years. As they keep their interest rate

high, the economy would keep on slowing down and we foresee that the unemployment rate

would keep on increasing along with the slowing down of their economy. The result to this is

that it will also increase the risk of potential riots and protests inside the country and also

increased crime rates. It has been proven that unemployment increases crime rates and we do not

know for sure until what level of unemployment these threats would start to grow to a worrisome

level. Especially when Turkey’s central bank has not announced at what specific level of

inflation rate they would start to bring down the interest rate.

III. INVESTORS POINT OF VIEW

From investors point of view, the recent Turkey’s central bank action where they stop lending

Lira to stop investors from shorting their currency caused a loss of confidence from investors.

People can invest with a high interest rates in Turkey but if the bank won’t let them pull the

money, investors might think twice before investing more money in Turkey.
As we can see that with that high of an interest rate, the Lira currency is still depreciating. We

think that it raises some big question marks as how a country with high interest rate would not

tempt investors to start moving their money to invest there.

Another political-economic factor that may cause a lot of investor doubting on investing in

Turkey is because the fact that the head of Ministry of Treasury and Finance of Turkey, Berat

Albayrak which is appointed by the current president of Turkey Recep Tayyip Erdoğan is his

own son in law. This led some people to believe that this is so that Erdoğan can control the

Turkey’s finance by handing the high-ranking position to his own relatives.

On the other hand, before we can call Erdoğan’s decision to put his own son-in-law as the head

of Ministry of Treasury and Finance of Turkey is an act to further gain total control of Turkey,

we need to see whether Albayrak is actually competent enough to handle the position.

A recent article showed that Albayrak failed to enthuse investors at a private meeting in

Washington. Albayrak was supposed to convince investors about their planning for the long-run

of the economy and how they are trying to improve the economy of Turkey. However, a lot of

investors aren’t convinced with Albayrak explanations and long-term plan for recovering

Turkey’s economy. Some of them are still convinced that Turkey is going downhill.

IV. POLITICAL POINT OF VIEW

There are also Political issues that may make investors not tempted to invest in Turkey. A few

research that we did further prove this point. Some problems that we found regarding political

issues in Turkey are:

1. The dictatorship era of Recep Tayyip Erdoğan

Turkey’s current president, Recep Tayyip Erdoğan, started as the prime minister of Turkey in

2003 and winning the election 3 times until 2014. In 2014 Erdoğan was appointed president and

in 2017 a Constitutional Referendum vote was held to change the existing parliamentary system

with presidential system and it was approved. Erdoğan then become the first president in the

presidential system Turkey renewing his president status from 2018 until 2023 and a potential for

his second term (2023-2028)

The Turkish Penal code Article 299 criminalizes insulting the president of the Turkey and since

Erdoğan’s rise as the President, there has been a massive investigation for people who criticize

him. This leads to some Turkish people to say that Erdoğan is a dictator, he criminalizes and

arrests everyone who oppose him and appoint his relatives to the key position in the government.

In 2019, the election for Istanbul’s mayor is held and the winner is the opposing party (CHP).

This is considered the first win for Erdoğan’s opposing party (CHP). Erdoğan’s party refused to

accept defeat and he demanded the Istanbul election to be cancelled and repeated saying that

“organized crimes” helped seal CHP’s victory.

Based on this, the market is pretty volatile mainly because a lot of people has different views

towards the Erdoğan’s party. Some think that the defeat of The AK Party in the Istanbul Mayor

election could be a start to the end of Erdoğan’s dictatorship era. Some think that this would

cause a lot of uproar inside the country which could be bad for the investors and economy.

2. The Kurdish Problem

The Kurdish problem is a great problem born of history. The Kurds are the nomadic people

mainly inhabiting in southeastern Turkey, northern Syria, northwestern Iran and northern Iraq.

The core demand of Kurds is to separate from each country and create an independent regime or
have autonomy and enough political and cultural rights inside each country. However, the

integrity of the sovereignty is the unswerving adherence of every country, so fights and wars

keep happening in these countries.

The Kurdish-Turkish conflict is an armed conflict mainly happened in southeastern Turkey

between Turkey and Kurdistan Workers Party (so-called PKK). As for western countries, such as

US and EU, especially Turkey, PKK is considered as “ terrorist organization”, so it has always

been the western countries, especially United States, giving Turkey military assistance to help

resolve the independence problem of Kurdish people.

As I have mentioned above, there’s also Kurdish people inhabiting in Syria. The People's

Protection Units or People's Defense Units(so-called YPG) is a mainly-Kurdish militia in Syria.

In early 2015, the group won a major victory over ISIL at the Siege of Kobanî, where the YPG

began to receive air and ground support from the United States and other coalition nations.

However, YPG has long been criticized by Turkey because of its alleged support for PKK,

especially since a rebellion in southern Turkey. Therefore, when YPG received military support

from US, this is leaving a deep wound on the Turkish side.

The impact of the conflict spreads beyond the physical and non-physical borders of eastern and

southeastern Turkey, where PKK terrorism reigns. The direct impact of the conflict has been a

sharp fall in economic activity for these regions. The loss of the members of active population,

the uneasiness of local people, and the rising uncertainty of whole situation will affect the

financial picture and the real economy of Turkey.

V. CONCLUSION
Based on our analysis regarding Turkey, we think that now is not a good time to invest in Turkey.

It is true that Turkey’s investment cost is really cheap right now but we don’t see any bounce-

back potential in the foreseeable future yet. We think that Turkey’s economy will still fall for

quite some time and will not recover within a short period of time.

Along with the political issues that the country is currently facing, we don’t think that it is worth

it to invest in Turkey right now when the risk of losing money way outweigh the potential profit.

We think that it’s best to analyze the market again once the inflation rate is stable under 10%

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