Investors Consider Thursday’s Turkish Central Bank Meeting Amid Currency Volatility
ANKARA: The Turkish lira continues to suffer heavy losses against foreign currencies. It fell to nearly 15 per dollar on Monday before the intervention of the Central Bank of Turkey.
Concerns about the country’s current economic policy are mounting among domestic and international investors, and another 100 basis point interest rate cut to 14% is expected at Thursday’s central bank meeting, despite the hike. of inflation.
However, such actions have so far been unsuccessful in light of the pound’s volatility. Rating agency S&P also downgraded Turkey’s outlook to “negative” due to unclear policy direction and growing external risks the country faces.
The depreciation of the pound has further increased the country’s inflation rate, as the economy is heavily dependent on imports. Queues of several miles to buy cheap bread have become the norm across the country.
Turkish President Recep Tayyip Erdogan met with Central Bank Governor Sahap Kavcioglu and Finance Minister Nureddin Nebati on Monday. Nebati also met with more than 60 representatives of the business community to try to reassure them.
“The economy will recover very quickly. You will see that we can deal with it without raising interest rates. Just trust us, ”the finance minister said, adding that the country’s macroeconomic indicators were all positive.
Consistent with the unorthodox assumption that lowering interest rates will lower inflation, the Turkish government says rate cuts and the fall of the lira support a new national economic plan that promotes economic growth, credit cheap, production and exports.
“If we win, we will win together. If we lose, we will lose together, ”Nebati said on Monday of the government’s new economic model.
Meanwhile, some grocery stores have started rationing sales of milk and oil as prices skyrocket.
In November alone, the pound lost about 30 percent of its value, while the official annual inflation rate hit 21.3 percent.
“The market has already forecast another 100 basis point rate cut (at the meeting) on Thursday – with the key rate falling to 14%, which is also expected to be the current cyclical low – which explains the recent depreciation of the pound to a new record low, ”Nikolay Markov, senior economist at Pictet Asset Management in Switzerland, told Arab News.
“In this context, a decision not to cut rates on Thursday will be a clearly positive surprise because it will convey a positive message on the independence (of the central bank) vis-à-vis the government. This will be just enough to contain the depreciation of the pound and improve investor sentiment at least in the very near term. “
Turkey’s top economic team has been discussing and explaining for a few weeks a new roadmap for the economy. Erdogan even suggested that the country follow China’s economic growth strategy by pursuing low interest rates and attracting foreign investors with a devalued currency.
“This is a credit and export driven model of economic growth, which has worked well so far, especially in light of the rapid and significant economic rebound in the aftermath of the first pandemic shock of the summer. 2020, “said Markov.
“Overall, the Turkish economy was only slightly affected by the pandemic shock, averting a recession in 2020, and is expected to grow at a stellar rate of 10.8% in real terms in 2021, which would be close to 14% above its pre-pandemic rate. level.”
However, he added that the Turkish model relies heavily on cheap credit financing, which explains the government’s current obsession with the central bank’s key interest rates and its willingness to cut rates to reduce the rate. private sector debt burden and thus stimulate credit growth.
Turkey’s exports last month hit a record high of $ 21.5 billion, an increase of 33.4 percent year-on-year.
But economists warn that this type of model, which favors credit, production, exports and growth, only works in the short term and is not sustainable in the medium to long term.
“This model leads to the build-up of macroeconomic imbalances which increase the risks of financial stability in the country, and leads to a higher country risk premium and higher borrowing costs,” Markov said. “This will be detrimental to capital inflows from foreign investors.
“Such a model also leads to a structural current account deficit, which makes the country highly dependent on foreign capital flows. The recent market turmoil was mainly triggered by the high and growing inflationary environment, which led to a record depreciation of the lira, thus hampering capital flows from foreign investors.
Economists point out that there is a solution to the current economic crisis in Turkey.
“We know what the remedy is for this situation: the cancellation of previous rate cuts by the (central bank), in order to start building a certain credibility of inflation by showing their determination and their primary objective of fighting against the inflation, thus containing the depreciation of the pound. “
Turkish law professor Izzet Ozgenc suggested the country’s authorities could declare a state of emergency.
“We, as a society, should be prepared for the state of emergency that could be declared following a severe economic crisis,” he wrote in a message posted on Twitter on Monday. He highlighted article 119 of the Turkish constitution, which allows the cabinet to declare a state of emergency for up to six months in response to economic crises, natural disasters and infectious diseases.
However, the idea of a state of emergency has been rejected and criticized by opposition figures.
Home sales in Turkey to foreigners climbed 48.4% in November as the pound fell. Around 7,363 properties were sold to buyers from other countries, the highest monthly total since 2013. They were particularly popular among Iranian, Iraqi and Russian buyers, who preferred Istanbul, southern Antalya and the capital Ankara. as places of purchase.