Notes on the Global Condition (2017/5)

All Eyes on Turkey

With its domestic politics in turmoil and the civil war in Syria on its doorstep, Turkey’s economy is in trouble too. The Turkish Lira has been in free fall since the summer. This matters because Turkey’s business sector has $ 212 bn in net foreign currency debt. The cost in Lira of servicing these obligations soars as the currency falls. To stabilize the exchange rate the central bank would normally raise interest rates. But Erdogan does not want to squeeze the small business and middle class constituency of the AKP. Instead, Erdogan yesterday denounced currency speculators as equivalent to terrorists. It is a recipe for crisis. A fascinating recent report by Renaissance Capital explains how it will be different from last time:

“While there are currently many Turkish lira bears, a repeat of the vicious spirals of FX weakness begetting more FX demand, as happened in 1994 and 2001, is far from inevitable. Those crisis devaluations came after the Central Bank of Turkey (CBT) abandoned currency support that opened the floodgates of demand for FX, as the banks, having built up extensive ‘moral hazard’ FX short positions, scrambled to buy FX. Today, Turkey has no effective banking sector short position, minimal retail FX borrowing (with plenty of retail FX deposits), Turkish corporates are export competitive, import pressures are low, and the vast majority of corporate FX borrowing has a maturity of over five years. For FX mismatched corporates, only a minority fearing cash-flow squeezes must chase FX. The current moves in the currency are more about a lack of economic domestic confidence and global risk


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