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August 17, 2018 www.intellinews.com I Page 2
Crisis in Turkey: Finance
minister wields the fiscal
hammer
the TRY moving to 4% up day on day against the dollar after the call.
But not long after, the fragility of Turkey’s situa- tion was demonstrated when the TRY lost some of its gains after news broke that US Treasury Sec- retary Steve Mnuchin had told a cabinet meeting that he was preparing to impose more sanctions on the Turks if they did not quickly release North Carolina pastor Andrew Brunson. The evangelical pastor—described as the “wonderful pastor” by President Donald Trump during the cabinet meet- ing—is under house arrest while being tried on espionage and terrorism charges which the US says are groundless.
By around 21:40 local time on August 16, the lira stood at 5.8205, 2.26% stronger versus the dollar on the day. Its loss versus the USD in the year to date thus stood at around 40%, but there has been a marked recovery in the currency’s value since it plunged all the way to an all-time low of 7.24 on August 13. That nosedive came after Turkish Presi- dent Recep Tayyip Erdogan—who claims Turkey’s financial troubles are not down to economic funda- mentals but are the result of an “economic at- tack” waged by foreign powers—accused the US of seeking to “stab your strategic partner in the back”.
In the much-anticipated conference call, Albayrak indicated the country would largely deploy fis-
cal measures to slow the economy and cut the hefty current account deficit and inflation run- ning at nearly 16%. With the orthodox path of a big interest rate hike seemingly ruled out—unless Erdogan, widely viewed as having taken control
of monetary policy, relents on his unconventional view that Turkey, despite its predicament, still needs cheaper money—Albayrak said ministries would be asked for expenditure cuts of 10-30%. Such fiscal squeezing would allow the govern-
ment to aim for a primary surplus of TRY6bn for the rest of this year, he said.
“Dotty views”
Not everybody was impressed by Albayrak’s planned navigation. Robert Ward of the Economist Intelligence Unit tweeted: “Albayrak’s plan to sta- bilise Turkey’s economy invites scepticism. Fiscal policy to do heavy lifting via cuts. Little to say on interest rates. Thus Erdogan’s dotty views on rate rises/inflation still prevail. CB independence/lack thereof thus still a key risk to stability.”
Cristiana De Alessi of BNP Paribas gave the finance minister some credit for his plans but warned that Turkey is not out of the woods. Citing Turkey’s heavy reliance on external funding—new data out on August 16 showed that as of the end of June Tur- key was on the hook for foreign debt repayments amounting to $179bn within a year—De Alessi said: “The finance minister provided some comfort by acknowledging that rebalancing the economy is a priority through both fiscal and monetary policy and that capital controls aren’t an option.”
She added: “The MTP [medium-term programme] released in September will be key to see what concrete steps will be taken to turn this into sustained action. It will also provide a benchmark to measure the new government’s progress. My main concern is a lack of contingency plan if debt cannot be rolled over or if a slower growth rate exacerbates corporate NPLs [non-performing loans. Turkey may require a stronger adjustment than is currently in their plans.”
Demonstrating that all is far from well with Tur- key’s economy, the Istanbul stock exchange’s main index slid by 3.46% on August 16 to 87,143 despite the ongoing lira recovery. Also, freshly released figures showing weak growth in Turk- ish industrial productionin June indicated that the economy, which outdid China by expanding 7.4% last year, is in for a hard landing.
A recession may be the medicine required for re- balancing the balance of payments, but the banks