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bne June 2018 Cover story I 27
“Then it starts, for whatever reason, to lose its luster: Right now, emerging mar- kets in general are being weighed down by a rising dollar and rising US interest rates. And at that point a self-reinforcing crisis becomes possible: External factors cause a loss in confidence, which causes a country’s currency to drop, but the falling currency causes the domestic value of those foreign debts to explode, worsening the economy, leading to fur- ther declines in confidence, and so on,” Krugman explained.
In a scathing assessment of Erdogan as “Turkey’s Trump”, he added: “When big shocks do hit, the quality of leadership
the fact that suddenly the central bank of Turkey could be under directions, instructions, or influence," Lagarde also said. "That has created a sense of uncer- tainty and a lack of confidence, which has found its way in the market."
In a May 25 assessment of the latest situation with the lira, analysts Gunter Deuber and Gintaras Shlizhyus of Vienna-based RBI wrote in a note: "As we predicted, the [central bank] hiking its late liquidity window rate by 300bp did little to stop the TRY bleeding. It appears the regulator faces a ‘classic’ EM crisis dilemma in which a ‘too little too late’ action paradigm puts
Flirting with the IMF
The RBI analysts also looked at whether the IMF might be called in, observing: “We would not rule out that a discus- sion regarding potential IMF support for Turkey may gain traction going forward (an IMF engagement as ‘external anchor’ may help to restore the policy cred- ibility). At some point ‘flirting with the IMF’ could even be a rational strategy for Turkish policymakers (like they did in the past without signing an IMF deal in the end). However, ahead of the elections at the end of June both a ‘flirting with the IMF’ scenario or even an actual turn to the IMF, are highly improbable options. Therefore, we would expect further volatility on Turkish markets in the days/ weeks ahead," the analysts said.
Capital Economics commented in
its May 25 note on Turkey that it looked like Erdogan had “taken the hint” where the need for interest rate hikes was con- cerned but, it cautioned, an abrupt slow- down could be ahead for the country.
Its note stated: “The latest activity data provide signs that economic growth is starting to slow. Admittedly, our GDP Tracker points to growth remaining strong at around 9% y/y
in Q1. But the manufacturing PMI fell to a 15-month low in April, before the latest financial market turmoil. And past experience suggests that the sharp tightening of financial conditions in recent weeks is likely to precipitate an abrupt slowdown.”
“It’s election season and the opposition smell blood”
suddenly matters a lot. Which is what we’re seeing in Turkey now. Authoritar- ian instincts and contempt for rule of law aren’t the only things Erdogan and Trump have in common,” according to Krugman. “Both also have contempt for expertise. In particular, both have sur- rounded themselves with people notable both for their ignorance and for their bizarre views.”
In St Petersburg, meanwhile, in her own interview with Bloomberg TV, Interna- tional Monetary Fund (IMF) managing director Christine Lagarde reminded the Turkish government of the impor- tance of preserving the independence of its central bank.
Mixed signals about whether the central bank is free of political interference created a sense of uncertainty among investors, putting the currency under pressure, she said, adding: "In terms of monetary policy, it’s always better for all political leaders to let the central bank governors do the job that they have to do, and to preserve and secure their independence."
"Some of the comments made [by Erdogan] alerted the international com- munity and particularly the investors to
the bank constantly behind the curve. In this regard the market awaits more concerted actions including a steep rise of all policy rates."
They added: “Sticky inflation and the inflation pass-through from recent
TRY devaluation as well as the overall challenging outlook for commodity importing EMs do not give [the central bank] any breathing space in this regard too. So far more emergency policy decisions may need to be taken in the coming weeks.”
Turkey's Reel Effective Exchange Rate Index
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