Ever since the United States began disseminating information proposing stimulus cutback in ensuing months, Turkey has had to bear the consequences. This has engendered investors to remove their money from emerging markets in search of a safer haven, or the United States. The news concerning the appeasement of stimulus changes investors expectations, with the expectation interest rates will increase.
Due to the political turmoil which has surrounded Prime Minister Recep Tayyip Erdogan as well as further violence in neighboring Syria and Iraq, investor confidence has begin to subside. The currency has lost a third of its value towards the American dollar since December and continues to struggle.
his has greatly threatened the Turkish economy which is highly reliant on dollar and euro pegged transactions and has raised concerns of an impending financial crisis. This has resulted in Standard and Poor’s to lower Turkey’s credit rating to negative, from its previous rating of stable. This could seemingly blow up on Turkey in the near future since Turkish companies have borrowed $130 billion in foreign currency, and as the Turkish Liro continues to fall, paying off these loans become increasingly difficult and these same companies who have borrowed could bust.
Recently, Turkey has driven its interest rates up to halt the declining Liro, imposed by the Turkish Central Bank, which will put a bottleneck on consumer spending. This should halt the consumption boom that was continuing through 2013, prior to the headwinds the Liro has been facing. This is a smart move by the Turkish government, due to the fact it needs to eliminate easy credit.
What is interesting about Turkey is that among its inhabitants, half are below the age of 30. This generally will make the housing market a more attractive and less tumultuous throughout the future with more people on average joining the workforce and consequently aiding the housing market. There is seemingly no signs of a housing bubble as there was in the United States, and Turkey is not at the same level of risk as Greece which does quell some fears as well.
In the future, Turkey is in the hands of foreign investors as well as the changes Washington makes. Other countries currencies including South Africa, Russia, and Argentina simultaneously have taken a hit. Seeing how the Liro will do in the near future will be interesting in comparison with others. Hopefully things start to shape up for fear Turkey’s economy will have much larger adversity to overcome.
Exchange rate graph from Yahoo! Finance added by the Prof
http://www.nytimes.com/2014/02/10/business/international/turkey-struggles-to-protect-its-lira.html?ref=economy
4 Comments
One piece of jargon: “contagion” – it need not be changes in US policy but rather accumulating unease that then triggers a more general panic. We saw this within the EU – Spain had been running budget surpluses (nods to Juan!) when Greece ran into trouble, but got tarred and feathered just the same. When a country is “small” in the global financial system, capital flows out of (or into) their domestic financial markets can be overwhelming in magnitude. And once a panic starts, you want to get out of the exit ahead of others, whether there is a fire or not.
It’s unfortunate that Turkey, a country recently pointed to as an example of a strong, developing economy, has so rapidly been pushed to the brink of a crisis. Your post also brings up the interesting concept that, while the effects of US Monetary Policy have global implications, the decisions are made on a national basis. The Fed obviously has as responsibility to help stabilize the US economy and help it to thrive but should the Fed also consider the effects their policies have on the rest of the world?
While the foreign debt Turkish Businesses hold is certainly troubling, Turkey still has strengths moving forward. The depreciation of the Liro will help to increase Turkish exports and will be a boon to Turkey’s growing tourism industry, a potentially large sector for the Turkish economy. Furthermore, their population structure, you mentioned 50% under 30, is naturally geared towards growth. With such a large portion of the population entering peak production age, production will naturally increase and the housing market will likely stay strong and growing for many years to come.
In comments, you might focus on the channel through which the Central Bank’s rate increase might affect the Liro exchange rate.
I think a similar case happened in Asia (known as the Asian Financial Crisis of 1997). What happened was that just like what Turkey is going through, investors took away their investments due to instability. Countries like South Korea had to borrow money from IMF to survive. However, I do not recommend borrowing money from IMF and follow its harsh rules.
For the increase in interest rate part:
Interest rates and exchange rates are highly correlated. By manipulating interest rates, the central bank can influence exchange rate (and the currency values). I think higher interest rates attract foreign capital so the exchange rate increases (and lower interest rates leads to decrease in exchange rates).
However, I am not sure what the central bank did will attract more investment. I am concerned with Turkey’s instability.
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