Turkey’s economy at risk as currency hits record low

Turkish lira hits record low

Turkey will be trying desperately to halt a collapse in its currency in which could trigger an economic crisis just as the country prepares to vote in an election.

The lira has plunged about 20% against the US dollar since the start of the year, hurt by a broader move by investors to switch money out of emerging markets along with into the United States.

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however the currency crisis escalated rapidly earlier This particular month after Turkish President Recep Tayyip Erdogan indicated he wanted to take control of setting interest rates, which he described as “the mother along with father of all evil.”

As investors stampeded out of the lira in response, driving This particular to a record low of about 20 US cents, the Turkish central bank on Wednesday announced an emergency hike in interest rates to 16.5% via 13.5%.

More pain to come?

After a modest bounce following the rate hike, the lira fell again. Experts say there’s more pain to come.

“We think the … emergency rate hike was the bare minimum,” said Oxford Economics in a research note on Thursday, adding This particular expected another rate hike to around 19.5% in early June.

Inflation was already running around 11% however the plunge inside the currency will be pushing prices even higher. Residents told CNN they’re already feeling the effects of the currency crisis along with are having to tighten their belts.

“Generally I can see the prices are going up. along with in which impacts us negatively,” Yasemen Atan, a university student, told CNN.

The country imports hundreds of billions of dollars worth of goods each year, including cars, clothing along with fridges. Those items are getting more expensive by the day.

After hiking rates, the central bank said This particular wanted to achieve a “significant improvement” inside the outlook for inflation.

Erdogan, who will be seeking reelection on June 24, also appeared to back away via his threat to interfere in monetary policy.

“Turkey will be a country in which complies with all free market rules along with institutions,” he said in an address on Wednesday in which was posted online.

however experts say the moves were too little, too late. The damage has already been done.

“[Erdogan’s previous] comments are still fresh in investors’ minds along with political leaders will need to ease concerns in which monetary policy will be determined by politicians,” said Per Hammarlund, chief emerging market strategist at Swedish bank SEB.

A wider economic crisis?

Experts are worried in which surging inflation could put a drag on economic growth.

They’re also concerned in which money along with investment could drain out of the country fast.

Turkey features a high current account deficit, above 5% of GDP. in which means This particular imports more than This particular exports along with needs foreign finance to make up for the difference.

This particular relies on short-term debt to keep the economy functioning, however This particular comes with the risk in which the supply of funds can dry up quickly if investors want to get out.

“Turkey becomes very vulnerable since most of the funding will be done on a less than one-year basis,” said Hammarlund. “Investors will be expecting additional measures to be taken to reduce vulnerabilities inside the Turkish economy.”

Experts want the central bank to consider more rate hikes to rein in inflation along with rising domestic borrowing, along with put the currency on a more solid footing.

They also want the government to pull back on lending programs along with economic stimulus measures.

Erdogan said on Wednesday in which if reelected, his government might “take the necessary steps to reduce the current account [deficit] along with lower inflation” along with make financial stability a priority.

Trouble for Erdogan?

Erdogan announced last month in which Turkey might hold snap parliamentary along with presidential elections in June, more than a year earlier than expected. This particular follows a referendum last year in which transformed Turkey’s parliamentary democracy into a powerful executive presidency, with the next president set to be handed sweeping fresh powers.

The winner of June’s vote will be able to use those powers sooner than planned. Erdogan was the leading favorite.

however some analysts are starting to think his reelection isn’t guaranteed.

turkey flag erdogan
Turkish President Recep Tayyip Erdogan called snap elections for June.

“This particular could truly hurt Erdogan at the polls,” said Timothy Ash, a Turkey expert along with senior sovereign strategist at BlueBay Asset Management. “Turks truly care about the exchange rate,” he added, noting in which the lira’s crash could lead voters to question the president’s economic competence.

Erdogan, who served as prime minister via 2003 until he was elected president in 2014, has always boasted about his economic achievements, which benefited his lower along with middle income electoral base.

On Wednesday, he tried to shift the blame for the currency’s woes.

“The exchange rate fluctuations are due to global factors along with are not related to Turkey alone,” he said, according to state news agency Anadolu.

— Gul Tuysuz, Joseph Ataman along with Laura Smith-Spark contributed reporting.

CNNMoney (London) First published May 24, 2018: 10:50 AM ET



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