JAKARTA (TheInsiderStories) – Is Turkey entered the financial crisis? As we know on Friday (10/08) the Turkish Lira plunged drastically in recent weeks as its deteriorating relations with the United States (U.S) exacerbated the weak confidence on the economy.
There’s a risk that the currency meltdown may spread to the Eurozone, as several of its major financial institutions are exposed to lira. Last Friday (10/08), Lira dropped up to 17 percent against the U.S dollar to the lowest level of all time. Throughout this year, the lira exchange rate has fallen to 42 percent over the American dollar.
Turkye’ President Recep Tayyip Erdogan and he central bank have days to prevent a tsunami of selling and a collapse of the country’s currency. Many economists had been predicting for months that Erdogan’s actions would lead to a currency crisis, which is what’s happening now.
Erdogan has give a signal that he would impose more control over financial policy after the June 24 elections. His statement is increasingly deepening market concerns about the ability of the central bank to cut inflation which has now reached double digits.
There are concerns that unless Erdogan adopts sensible policies, the result will be a full-scale national economic crisis. The president itself denied Turkey was in a crisis. He stressed the collapse of Lira as the ‘fluctuations’ of global financial market and had nothing to do with the economic fundamentals.
We believed, Turkey’s economy is going overheating if the government has no intention of tackling the imbalances. The economists are calling on the central bank to hold an emergency meeting before that date in order to implement a sharp rise in interest rates before it is too late to have no effect whatsoever.
As showed by Fitch ratings, they concerns on the central bank’s independence regarding Erdogan’s remarks. It said, his statement to have a greater vote in monetary policy increases the likelihood of the country’s economic policies becoming more unpredictable after the vote.
Fitch, like other global rating agencies assessed Turkish debt goes into junk status. The international rating agency warned that the erosion of central bank independence would put “further pressure on Turkish foreign debt credit profile.”
While, The International Monetary Fund (IMF) noted that rapid growth in Turkey has contributed to economic overheating, in the form of widening internal and external imbalances, including a positive output gap, high inflation and a wider current account deficit.
IMF noted that large external financing needs, limited foreign exchange reserves, changes in investor sentiment towards emerging markets, and persistent domestic and geopolitical risks also pose challenges.
Noting that the economy has been resilient thus far, IMF emphasized that, looking ahead, macroeconomic policies should be geared towards addressing the imbalances, lowering inflation, and strengthening buffers. In addition, comprehensive structural reforms will be necessary to boost Turkey’s growth prospects.
The agency called for front-loaded monetary tightening to help contain inflation, re-anchor expectations, underpin the Lira, and allow reserves to be rebuilt. IMF agreed that moving over time to more conventional monetary instruments would help underpin the transparency and effectiveness of monetary policy. The board underscored the importance of central bank independence.
Emerging Market Tumbles
The domino effect of Turkey’s financial crisis has triggered fears that it will spread quickly to European financial markets and other developing countries’ financial markets on Friday, The effects of the Turkish crisis have begun to spread to world stock exchanges. A sell-off hit global stock markets, including on Wall Street.
The Dow Jones Industrial Average closed down 0.77 percent at 25,313.14, the S&P 500 index dropped 0.71 percent to 2,833.28 and the Nasdaq Composite index dropped 0.67 percent to 7,839.11. The MSCI All-Country Index which recorded stock indexes in 47 countries fell 1.22 percent at the close of trading last week.
Many investors said that countries with a gross domestic product (GDP) worth $900 billion had already headed for the crisis. The sell-off symbolizes a motion of no confidence in the new government system which gives Erdogan unrivaled authority because it has paralyzed the bureaucracy in the country.
Investors said that only extreme measures could bring Turkey back from the brink of crisis. Previous taboo options such as international bailouts or capital controls, are now beginning to be discussed in Turkish financial circles.
The currency crisis is very vulnerable for Turkey. Because the heap of Turkish foreign debt is large. Foreign loans of Turkish private companies have equaled about 40 percent of Turkey’s annual economic output.
Over the past year, some of the country’s biggest and most respected conglomerates have requested a debt restructuring of billions of dollars of foreign debt, and many more will surely follow after the lira’s exchange rate has fallen further.
Now investors believe that the Turkish Central Bank must put aside Erdogan’s wishes and announce a significant increase to the benchmark interest rate of 17.75 percent to stop the Lira from falling free.