Political uncertainty and violence wobbles Turkey’s economy

08/16/2015 - 16:48 PM

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ISTANBUL - The failure to form a coalition government in Turkey last week and the prospect of another election has dealt yet another blow to the local stock market and prompted a further decline in the Turkish lira. It also raised concerns about the long-term impact on an already sluggish economy, which has become a growing cause for concern among analysts.

The lira set a historical low of 2.83 against the US dollar on 13 and 14 August, while the Istanbul Stock Exchange BIST 100 index dropped 3 percent on 13 August and is trading at its lowest since March.

For Mustafa Sonmez, an economist, the currency depreciation does not bode well for Turkey since the country has $400bn of debt, 65 percent of which is private sector debt and 40 percent is short-term debt.

“Such depreciation will lead to import-related inflation and will have no benefit for Turkish exports since they are already decreasing due to the situation in the European Union and the Middle East,” Sonmez told Middle East Eye.  

Despite falling oil prices, which has slowed down inflation globally, Turkey’s inflation rate remains at a stubborn 7 percent, eroding wages while leading to an increase in the price of almost all commodities.

The Turkish Central Bank intervened on Friday by tweaking policy tools, such as reducing the one-week dollar deposit rate from 3 to 2.75 percent and tightening liquidity by opening a 19bn ($6.7 bn) Turkish lira one-week repo auction to stem the lira’s slide, but its impact will be limited at best, according to economists.

The central bank really needs to take a tougher approach regarding interest rates, said Mehmet Kaytaz, a professor and dean of the faculty of economics and administrative sciences at Istanbul’s Isik University.  

“It is very difficult to control exchange rates with the measures it [the central bank] is taking. But we should remember that the central bank also faces political pressure when it comes to raising interest rates,” Kaytaz told MEE.  

On many occasions during the past year, many top government officials, including President Recep Tayyip Erdogan, have publically directed criticism at the central bank and have pressured it to keep interest rates low. 

Sonmez also said the central bank does not have sufficient means to bring this currency depreciation under control.

“The central bank’s reserves are not at a sufficient level, and the outflow of foreign capital means that the current account deficit is financed by the central bank’s reserves, so there is not much it can do when it comes to the exchange rate,” said Sonmez.  

Ankara relies heavily on foreign capital inflows to finance its current account deficit, which in large part is down to the country’s reliance on energy imports. Capital flight adds pressure on the central bank’s meagre foreign currency reserves as they need to be channelled toward financing the country’s external debt, leaving it little manoeuvring space to have an impact in other areas.

A caretaker government has run Turkey since the 7 June general election, when no single political party secured a majority to form a government. The failure to form a coalition took Turkish commentators by surprise as polls seem to suggest that new elections will not significantly change the outcome.

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