Inflation/Exchange Rate Problem

I completed my nearly month-long tour of Great Britain in Edinburgh and finally joined the ranks of those posing in front of this iconic statue.

I was constantly searching for opportunities that would meet my criteria for long-term value investment and was researching the before and after of every economic activity. But I came back with a completely different lesson. I experienced practically something that we always think and accept theoretically.

“If inflation is at very high levels in a country that is dependent on foreign countries in terms of economy and the increase in exchange rates is not at least at the inflation level, that country gradually becomes an “expensive” country.”

The country I am talking about is Turkey, my own country, where I returned after my trip.

In Turkey, when you say, “I think exchange rates should increase at least as much as inflation,"? you do not get very good reactions. Therefore, I want to explain why I think so and what the result is if it does not happen, with numbers and events.

Turkey is a very important tourism country. It is a country that is among the top 10 countries that attract the most tourists in the world every year. Its biggest regional competitors are Greece, Italy, and Spain. Turkey has expensive nightly hotel prices in these three countries in terms of foreign currency (USD, EUR, or GBP). Because the increase in products, services, and fees has been very high in percentage terms, but the foreign exchange rates have increased much less than these increases.

When 1 USD = 25 TRY, the nightly price of a hotel room that was 5,000 TRY / 200 USD increased to 10,000 Turkish liras, the USD/TRY became 31-32. Therefore, the room that was $200? suddenly increased to more than 322 dollars. Therefore, especially in coastal hotels, there were either foreign tourists who made reservations in advance or local tourists who did not have the opportunity to go abroad.

If you examine the number of tourists Turkey lost and the number of tourists its competitors gained, you will see that there is an obvious transfer.

Turkey is a very important textile country. The textile sector has the second highest share in the Turkish economy and ranks second among all industrial sectors in terms of production and export (after the automotive sector).

The ratio of the textile sector to the total number of employees is very high, and Turkish textile products are definitely of much higher quality than textile products made in the Far East. Turkey was one of the main production locations of many world-brand products, from ready-made clothing to accessories and luxury consumer goods.

Textiles is a sector consisting almost entirely of minimum-wage workers. The most important cost is the worker. The increase rate of the minimum wage in Turkey in the last three years is 375%. When the minimum wage was determined three years ago, it was 481 USD. When the current minimum wage was determined, it was 577 USD, and as I write this article, it is exactly 500 USD.

In Bangladesh, which are the biggest competitors in textile and ready-made clothing products, the minimum wage is 105 USD, in Vietnam 93 USD, in Indonesia 326 USD, and in China 363 USD. Therefore, the textile sector in Turkey is literally dead.

London is among the most expensive cities in the world. I traveled every inch of the city for two weeks and stayed in a very good neighborhood. If you measure prices in GBP, I can guarantee that you will come across very few things in London that are more expensive than in Turkey. This includes a nice dinner, a quality pair of shoes, or an ice cream cone in a fancy shop, and many other products and services that come to mind.

Moreover, we should not forget that the rent for an ordinary flat in London was 1,000 pounds during the pandemic, while today the same flat is rented for 1,800 pounds. Or the fish and chips you ate for 6-7 pounds three years ago is 17-18 pounds today.

If inflation in Turkey increases at a similar rate and GBP.TRY does not respond to this at the same rate, London will become a very cheap city compared to Istanbul, and living in London will become more attractive for someone who earns TRY.

This may sound good to many. However, in Turkey, where you will earn TRY, the economy is dependent on foreign countries. If the price of products and services becomes expensive in foreign customers' own currencies, their business with Turkey will decrease or disappear. In other words, you may not have a job where you can earn that Turkish Lira that makes living in London attractive!

Whether accepted or not in the country, unless a different economic structure is adopted, it is essential for long-term stability that exchange rates increase at the rate of inflation.