The Turkish markets’ reaction to a U.S. Federal Reserve warning Wednesday on the risks to the global economy, as well as the resulting sharp fall in both Asian and Western markets, has proven once again that the local economy is not an “isolated island,” according to experts.
The Turkish Lira weakened to an all-time low of 1.8420 against the dollar Thursday in Istanbul.
The lira has been the world’s worst-performing major currency this year, losing 15 percent as Central Bank measures to boost exports and narrow the current-account deficit while stimulating growth took effect.
Turkish shares fell the most in more than a week, following in the wake of emerging markets, which dropped based on the Federal Reserve’s concerns.
The Istanbul Stock Exchange’s main ISE 100 index fell by nearly 4.68 percent to 57.980 on Thursday.
The Federal Reserve has turned off the money tap providing liquidity for the market, said Selim Somçağ, an Istanbul-based independent economist.
“There is no doubt that Turkey will be among the top ones to be affected by the shrinkage in liquidity,” he told the Hürriyet Daily News during a phone interview Thursday. “The U.S. Federal Reserve has been issuing money to ease the wounds of the global economy and Wall Street. But today it is clear that they will not issue more in next few months.”
The decision will eventually hit the countries with high volatility, he said. “Turkey has approximately $75 billion in annual current account deficit and is hardly financing it,” Somçay said. “The next few months will be tougher than ever for the Turkish economy.”
IMF criticism
The International Monetary Fund, meanwhile, recommended that Turkey halt foreign currency sales to conserve hard-earned reserves.
“In the past few weeks [Turkish] Central Bank reserves declined by US$6 billion through sales, lower reserve requirements on foreign exchange liabilities, valuation changes, and foreign debt payments,” the IMF said in a statement on its website Thursday after visiting Turkish authorities in Ankara.
“Part of this will be compensated by a new measure allowing banks to maintain up to 10 percent of their required reserves on lira liabilities in foreign exchange [adding about US$3.7 billion to reserves if fully utilized by banks]. It is advisable to increase the policy rate to prevent an overly rapid depreciation.”
The report also said inflation may accelerate to 8.5 percent by the end of the year and added that the Central Bank may be required to tighten monetary policy to reach its price-growth goals. “This tightening would best be delivered through an increase in the policy rate and allowing the realignment of money market rates with the policy rate,” it said.
Ongoing European woes are also continuing to raise concerns in the Turkish economy. Greece, the country at the heart of the European crisis, is more likely to become bankrupt, rather than survive, according to Özlem Derici of the Erste Group.
“Greek bankruptcy will have direct and indirect effects on Turkey,” she told the Daily News.
Should Greece defaults on its debt, the Turkish economy would naturally be impacted due to external trade channels as Western Europe accounts for about half of Turkish exports, BNP Paribas economist François Faure said.
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Source : hurriyetdailynews.com
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