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We have only one question with two options: Regardless of how much exchange rates may rise and how high they rise, in the future, when partnering with an institution like the IMF, the exchange rate may fall; if it falls, why does it fall and at what level?
I will only use two parameters in this analysis for clarity. Real effective exchange rate and rate of increase in inflation.
With these two parameters we can determine the “real price” of the currency as a fictitious estimate, but essentially this study wants to give an idea.
The simplest method is to raise a past exchange rate to the inflation rate. For this, such a past date should be chosen as this date; There must be a date when TL is neither valuable nor worthless, it is worth all its worth.
For this, we will look at the real effective exchange rate (REDK) indices published each month by the CBRT. When the value of these indices is 100, it means that it is worth TL; If it exceeds 100, TL is evaluated above its value; If it is below 100, we understand that it is trading below its value.
CBRT publishes many indices that calculate the real value of the exchange rate. The CPI Overseas Consumer Index and the Yi-PPI Producer Price Index, which I consider the most realistic, seem reasonable to me. Because these are the least “improved” indices.
Basic question: The CPI Abroad Consumer index indicates the index 100 that TL is neither cheap nor expensive; For what date was the latest calculated?
Answer: In August 2017, this index was calculated as 100. In other words, it was worth TL on this date, so it is neither valuable nor useless.
In August 2017, the value of one dollar was 3.45 TL and one euro was 4.15 TL.
In this three-year period, according to the TURKSTAT inflation data, the inflation index went from 300.18 to 533.44; that is, as a percentage, inflation increased by 77.70%.
The simplest and easiest way to calculate the current value of foreign currency based on Yi inflation; to add to these rates the compound inflation rate that has occurred since that day.
If exchange rates rise based on the inflation rate: by the end of August 2020, one dollar (3.45 * 1.7770) = 6.13 TL and one euro (4.15 * 1.7770) = 7 , 37 TL. Current: October 2020, $ 8.14 TL and Euro 9.61 TL.
Provisional Summary: The dollar, which should have been TL 6.13 according to the Yi-PPI, increased to TL 8.14; that is, 2.01 TL or 33% foam was formed in one dollar. While the euro should have been 7.37 TL, it was 9.61 TL, which means 2.24 TL or 30% foam formed.
The value of the CPI-based effective exchange rate index, which the CBRT calculated as 100 in August 2017, fell to 67.96 in October 2020.
According to this index, the real value of the dollar is 6.16 TL and the euro is 7.27 TL.
Final summary: the value of the TL has dropped too much. The level of gap between the actual and the assumed level is too high. As in the past, this gap will surely close one day.
The dollar, which should have been 6.16 TL at its high in October 2020, has risen to 8.14 TL and is now 8.55 TL. Again, in October, the euro, which should have been a maximum of 7.37 TL, rose to 9.61 TL, today at 9.95 TL.
WHEN WILL THE RATES DOWN?
Before answering this question, there is another more crucial question: “Will rates continue to rise?”
No one knows exactly the answer to this question, but based on some steps to take or not to take, the currency could react up or down. For example, if interest rates are raised by 500 points and some additional macroprudential measures are taken, I imagine the dollar could drop to 7.30.
If the current account deficit cannot be reduced and other bad decisions are made, I cannot even predict how much exchange rates will rise.
If a global agreement is reached with the IMF, I can say that the exchange rates will converge very closely to the real values I calculated above (i.e. $ 6.16 and € 7.37).
The question immediately comes to mind whether we should never go to the IMF, even if we take the measures the IMF would like. Maybe it could have been, but I’m worried it’s too late.
It may not have fallen into an economic drift, where it is not clear where it will end, and these bubbles may not have occurred in exchange rates; if there were no managerial or managerial gaps.
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