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8/13/2018 Turkey crisis: Economy faces weak lira, inflation, debt and tariffs

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What went wrong for Turkey? Its


economy is 'in the midst of a
perfect storm'
Turkey has in recent years been one of the fastest-growing economies in the
world, but its impressive growth numbers were fueled by foreign-currency debt.
The country's borrowing resulted in deficits in both its fiscal and current accounts,
and Turkey doesn't have large enough reserves to rescue the economy when
things go wrong, experts say.
Making the situation worse for Turkey is President Recep Tayyip Erdogan's
preference to keep interest rates low even though inflation is more than three
times the central bank's target.

Yen Nee Lee


Published 2 Hours Ago


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Chris McGrath | Getty Images

A supporter of Turkish President Recep Tayyip Erdogan waves a flag against an electronic billboard
during a rally in Kizilay Square on July 18, 2016, in Ankara, Turkey.

The free fall in the Turkish lira has stoked fears of an economic
fallout that could spill over into other emerging markets and the
banking systems in Europe.

Turkish President Recep Tayyip Erdogan blamed the plunge in the


currency on "an operation against Turkey" and dismissed
suggestions that the country's economy was facing troubles. But
strategists from J.P. Morgan Asset Management said the NATO
member has found itself "in the midst of a perfect storm" of
worsening financial conditions, shaky investor sentiment, FROM THE WEB Sponsored Links by Taboola
inadequate management of the economy and tariff threats from the
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8/13/2018 Turkey crisis: Economy faces weak lira, inflation, debt and tariffs

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In the immediate term, policy decisions out of Washington have


sparked Turkey's currency crash: The lira plunged as much as 20
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percent against the dollar on Friday after President Donald Trump Blinkist
said he approved doubling metals tariffs on Ankara. But the cracks in
Turkey's economic foundation were already spreading before the
American president made his move. by Taboola

Bove: Jamie Dimon


How did Turkey get here? 'knows what he is
talking about' when it
Turkey has in recent years been one of the fastest-growing
comes to danger
economies in the world, even outperforming economic giants China warnings
and India last year. In the second quarter of 2018, the country Trump applauds Harley
reported 7.22 percent growth in its gross domestic product. Davidson boycott, says
shift of production
That expansion, however, was fueled by foreign-currency debt, abroad is a 'really bad
analysts said. At a time when central banks around the world were move'
pumping money to stimulate their economies after the global ‘Respect’ the bond
financial crisis, Turkish banks and companies were racking up debt market and what it’s
denominated in U.S. dollars, they said. trying to tell us, Fed's
Bullard warns
Turkish lira plunges
"(Turkish President Recep Tayyip Erdogan) is 14% versus dollar after
here to stay, and
 markets don't have  Trump authorizes
 
confidence in him. That's a dangerous mix." doubling metals
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on Turkey
-Richard Briggs, CreditSights analyst
China ignores Trump
threat on Iran, says
That borrowing, which fueled consumption and spending, resulted business there will
continue
in Turkey running deficits in both its fiscal and current accounts. The
former happens when government spending exceeds revenue, while Crocs to close last of
manufacturing plants,
the latter essentially means a country buys more goods and services
but says, 'We aren't
than it sells. going anywhere'

The country's foreign currency debt now stands at more than 50 TRENDING NOW
percent of its GDP, according to estimates by the International
Monetary Fund. 1. What went wrong for
Turkey? Its economy
Implications of Turkey's debt is 'in the midst of a
perfect storm'
Turkey is not the only economy with "twin" deficits and high
amounts of foreign currency debt. Indonesia, for example, also runs
fiscal and current account deficits and its foreign currency borrowing 2. Trump's trade war
advantage: The US
is roughly 30 percent of GDP. economy is 'firing on
all cylinders,' says
But unlike Indonesia, Turkey doesn't have large enough reserves to expert
rescue the economy when things go wrong, said Richard Briggs, an
analyst from research firm CreditSights. 3. After hitting new
record low, Turkish
According to Briggs, Turkey's reserves are notably low compared to lira pares some
its $181 billion in short-term debt denominated in currencies other losses on central
bank statements
than the lira. On top of that, much of the foreign currency in Turkey

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8/13/2018 Turkey crisis: Economy faces weak lira, inflation, debt and tariffs

is held by banks, and those funds could be withdrawn by customers, The IRS is cracking
he added. down on this small
business tax break.
That means when the lira falls, Turkey may not be able to buy up its What it means for
you
currency to prevent it from spiraling further. If that situation
worsens, the country would have to find other ways to finance its
debt, including possibly getting bailed out by the International 5. Indian rupee hits
record low, central
Monetary Fund. bank intervention
seen
Economic mismanagement
To many analysts, Turkey wouldn't have gotten into the current
predicament if its central bank had been left to do its job.

The Turkish economy has been "overheating" with inflation — at 16


percent in July — way exceeding the central bank's target of 5
percent. Raising interest rates could have helped to stem such a
massive increase in consumer prices: Higher rates tend to attract
foreign investors, who would need the lira to buy Turkish assets.
That could in turn support the currency, which makes imports
cheaper and lessens the burden of paying back foreign debt.

But Erdogan has said he's in favor of lower interest rates to continue
driving growth. His influence over the country's central bank has
undermined investor confidence, experts have said.

"President Erdogan continues to prioritize growth and lower rates


which will extend the current crisis, rather than allowing the
economy to rebalance. He is here to stay, and markets don't have
confidence in him. That's a dangerous mix," Briggs wrote.

What's next for Turkey?


Without raising interest rates, Turkey has few other options to get
out of its economic problems, said Eric Robertsen, global head for
foreign exchange, rates and credit research at Standard Chartered
Bank.

Turkey earlier said it was limiting banks' foreign exchange swap


transactions but it wasn't implementing capital controls. Those
measures are merely "baby steps" and won't do much unless interest
rates are raised, Robertsen told CNBC's "Squawk Box."

"The interest rates policy is kind of the critical line of defense," he


said. "What they have to do is make sure that currency doesn't leave
the country in a full-fledged capital flight ... it has to be a
combination of currency measures and interest rates, there's no way
around that."

Yen Nee Lee


Correspondent

RELATED SECURITIES

Symbol Price   Change %Change


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8/13/2018 Turkey crisis: Economy faces weak lira, inflation, debt and tariffs
Symbol Price   Change %Change

TRY= 6.8255 0.399 6.21%


 

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