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October currency review

Mainstream economic theories are far from perfect. Excessive attachment to them can lead to serious mistakes, such as the austerity drives which followed the global financial crisis and arguably held back recovery for a decade. However, usually there is a lot of wisdom behind economic orthodoxy and to actively pursue policies which ignore it is very risky indeed.

Take the British government, which, having ignored the views of virtually every serious economist by ploughing ahead with a 'hard' Brexit, risks enormous damage to the UK economy. Or President Trump in the United States, who claimed in 2016 that he could defy economic gravity by building lots of infrastructure and cut the taxes needed to pay for it. The subsequently non-existent 'Wall' and lack of other promised infrastructure may yet lose him yesterday's election, although the tax cuts he did make could perhaps still win it for him - the tense vote count continues.

But the most stubborn defiance of tried-and-tested economic models comes from President Erdogan of Turkey. Most central banks, when faced with soaring inflation, will raise interest rates to reduce borrowing (and therefore spending) in the hope of slowing price rises. But not Turkey's. For years Erdogan has pressed the bank to heed his belief that only low interest rates will bring inflation down, not higher ones. His reasoning seems at least partly based on a misunderstood episode in US economic history, but goes something like this: low interest rates keep people spending and the economy growing, which should boost the lira and bring down import prices. Unfortunately, many more factors affect currency values than just GDP growth and when one of the biggest influences driving your currency down is an alarming trade deficit, encouraging people to keep buying stuff, most of which comes from abroad, is only likely to weaken the lira more and push import costs and inflation up, not down. In any case, Erdogan's theory clearly isn't working; annual inflation has rarely been below 10% since early 2017 and hasn't been below 5% since 2012. The lira has lost more than a third of its value against the euro in the last 12 months (see last table below); and just guess which currency was the world's weakest in October, when the central bank again failed to hike interest rates...

Yes, Turkey's currency fell a further 9% against the euro during the month and hit a record low against the US dollar. While US sanctions, geopolitical disagreements (some with Nato allies), and the Covid-19 pandemic all played a part, the president's refusal to accept economic orthodoxy was essentially to blame.

Countries experiencing largest currency losses in October
Currency code Movement v EUR
28 Sep - 2 Nov 2020 (%)
Argentina ARS -4 36.6
Brazil BRL -4 3.1
Ethiopia ETB -4 22.3
Seychelles SCR -7 1.8
Turkey TRY -9 11.7

The Argentinian peso was again a heavy faller against the euro in October and pressure on the authorities to effect a major devaluation is building. The exchange-rate regime is becoming increasingly chaotic and new capital controls are harming the economy. Official and black market exchange rates continue to diverge and foreign exchange reserves are shrinking. However, the government has made assurances that it can maintain the official exchange rate without a devaluation.

As we reported last month, a devaluation is (almost) definitely coming in Cuba, where the government has urged calm ahead of the reform (due by the end of 2020) to unify the island's dual exchange-rate regime. Here are more details of what's proposed.

The launch of Air Liberia, the signing of several bilateral cooperation agreements with Morocco and an injection of international aid to help the country fight Covid-19 combined to make the Liberian dollar the strongest currency in the world during October (see next table). The gains make up for most of the losses the currency has endured in the last few months.

Countries experiencing largest currency gains in October
Currency code
Movement v EUR
28 Sep - 2 Nov 2020 (%)
South Africa

There have been significant changes recently in exchange options for the Lebanese lira. Previously, expats and others had been able to access the now-defunct 'Syndicate' rate for exchanging dollars, but this has been effectively replaced by the so-called Lebanese dollar rate at almost the same level (USD 1 / LBP 3900). However, accessing this rate requires one's physical presence at a bank, and while shops may also offer this rate for those paying in dollars, moving around crisis-ridden Beirut, where crime levels have lately soared, may now be considered too risky by international employers. Card transactions are still being processed at the official exchange rate, which remains pegged at USD 1 / LBP 1507, so this rate might now be the most relevant to expats. The illegal black market offers much better rates for exchange (latest USD 1 / LBP 7100, which has strengthened from LBP 8300 at the start of October), but is even riskier and cannot be recommended. ECA will publish the September 2020 cost of living indices at both the Lebanese dollar rate and the official rate, so companies can choose between the two according to which rate their assignees can access most safely.

If you need guidance on remunerating international staff in Lebanon or anywhere else, please do get in touch.

Finally, here is this month's selected currency movements table:

Selected currency movements (v EUR)
Country Currency code % movement to 2 November 2020 v EUR since: Latest official annual inflation (%)
(1 month)
(3 months)
(6 months)
(12 months)
Argentina ARS -4 -7 -20 -27 36.6
Australia AUD 0 -1 +3 -3 0.7
Brazil BRL -4 -9 -11 -33 3.1
Canada CAD 0 +2 -1 -6 0.5
Chile CLP +1 0 +2 -8 3.1
China CNY +2 +6 -1 +1 1.7
Egypt EGP 0 +3 -6 -2 3.7
India INR -1 +2 -6 -10 7.3
Indonesia IDR +1 +1 -5 -10 1.4
Japan JPY +1 +2 -4 -1 0.1
Kenya KES 0 0 -8 -10 4.2
Korea Republic KRW +3 +6 +1 -2 1.0
Mexico MXN +4 +5 +8 -14 4.0
Nigeria NGN -1 +2 -5 -10 14.3
Norway NOK 0 -4 +2 -9 1.6
Philippines PHP 0 +3 -2 0 2.3
Poland PLN -1 -5 -1 -8 3.2
Russia RUB -2 -6 -11 -23 3.7
Singapore SGD +1 +2 -3 -5 0.0
South Africa ZAR +4 +5 +8 -12 3.1
Sweden SEK +2 -1 +3 +3 0.4
Switzerland CHF +1 +1 -1 +3 -0.8
Turkey TRY -9 -16 -21 -35 11.7
United Kingdom GBP +1 0 -3 -5 0.5
United States of America USD 0 +1 -6 -5 1.4
Venezuela VES 0 -33 -60 -95 1813.1
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