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Erdogan’s refusal to hike interest rates batters Turkey’s economy

Atilla YeşiladaPosted on23 February, 2022

Turkey which is battling high inflation and falling currency value has another challenge now: widening current account deficit– the difference between inflows and outflows of foreign exchange in the country. After recording a current account surplus for three months between August and October, it dropped into the red once again from November. The figure is only expected to rise with imports, especially with high crude prices going up.

 

Domestic demand is slowing, too, as the government battles with the challenges of the Ukraine Crisis. February capacity utilization and   four different business confidence surveys registered declines.

 

Besides, as the US Federal Reserve is now all set to increase interest rates next month, the pain for many other economies could just increase. While many countries and their central banks have been gradually preparing for this rate hike, economies such as Turkey which have actually reduced interest rates despite the surge in inflation, will feel the brunt even more.

 

Fed Interest Rate Hikes Will Hurt Turkish Economy

 

 

Fed rate hikes would mean  outflows of foreign capital EM. This will impact local currencies besides making it costlier for the emerging economies to raise funds from the bond markets.

 

Turkish economist Mustafa Sonmez wrote in Al Monitor that most emerging economies have already taken several steps to weather the economic impact of the Fed’s potential rate hikes, including interest rate hikes of their own to safeguard the value of their currencies and prevent the flight of foreign funds.

 

Turkey’s Energy Shortage Reaches Critical Point

 

“But Turkey’s Central Bank did the exact opposite by cutting the interest rates 500 basis points since September under political pressure, triggering an outflow of foreign funds — a process likely to speed up by the Fed’s rate hikes,” he said.

 

Turkey’s inflation already hit 48.69 per cent in January. Though since January beginning, the Turkish Lira’s value to a dollar remained more or less steady at around 13.35 to 13.8, many said that the rate hike could once again put pressure on the currency.

 

Earlier this month, ratings agency Fitch, downgraded Turkey’s sovereign debt rating to “B+” from “BB-” and highlighted those risks arising from high inflation and weak foreign currency liquidity have risen due to the government policies.

 

However, despite the increased economic risks, Turkey’s President Recep Tayyip Erdogan has remained adamant in his decisions. Not only has he repeatedly defended his decisions, he even claimed that the low interest rate regime would bear fruit in the future.

 

February data signals a domestic demand slump

 

Seasonally adjusted (SA) Capacity Utilization Rate (CUR) of Manufacturing Sector decreased by 0.8pps MoM to 77.2% (Prior: -0.4pps, 78%). SA Real Sector Confidence Index (RSCI) decreased by %1.8 to 109.9 (Prior: +1.6%, 111.9), wrote economists for Yatirim Finansman, a leading brokerage house catering to foreign institutional clients.

In addition, Services Sector Confidence Index decreased by 1.2% to 118.7 (Prior: +1.2%, 120.2). Retail Trade Sector Confidence Index decreased by 3.8% to 119.8 (Prior: +2.5%, 124.4). Construction Sector Confidence Index decreased by 3.3% to 82.7 (Prior: -5%, 85.5).

 

 

By Mahua Venkatesh

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Tagscurrent account deficit February confidence data rate cuts Turkish economy Ukraine crisis

Published By: Atilla Yeşilada

GlobalSource Partners’ Turkey Country Analyst Atilla Yesilada is the country’s leading political analyst and commentator. He is known throughout the finance and political science world for his thorough and outspoken coverage of Turkey’s political and financial developments. In addition to his extensive writing schedule, he is often called upon to provide his political expertise on major radio and television channels. Based in Istanbul, Atilla is co-founder of the information platform Istanbul Analytics and is one of GlobalSource’s local partners in Turkey. In addition to his consulting work and speaking engagements throughout the US, Europe and the Middle East, he writes regular columns for Turkey’s leading financial websites VATAN and www.paraanaliz.com and has contributed to the financial daily Referans and the liberal daily Radikal. View all posts by Atilla Yeşilada

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