Turkish economy in catastrophe as Trump announces doubling of import tariffs
Image: CNBC
Relations with Ankara were “not good at this time” said the United States’ President Donald Trump on Friday, following the news that the States was doubling tariffs on steel and aluminium imports from Turkey.
The lira lost 20 percent of its value versus the American dollar on Friday and then plunged to a record low in early Asia Pacific trade on Sunday: 7.24 lira to a dollar. It then gained some ground after Turkeys banking regulator announced that it would limit the ability of the country’s banks to exchange the lira with foreign currency. More than 45 percent of the lira’s value was lost this year, amid a majority believing to be an effect of Turkish President Recep Tayyip Erdoğan’s control of the economy, waning relations with the US, mainly over the Syrian war and his decisions to lower interest rates during inflation. Finance Minister BeratAlbayrak said that Turkey has drafted an economic action plan and will start implementing it immediately to ease investor concerns. In an interview with Hurriyet newspaper, he described the lira’s weakness as “an attack”, reiteratingTurkey’s President Erdogan – who is his father-in-law – and said the action plan was ready.”From Monday morning onwards our institutions will take the necessary steps and will share the announcements with the market,” he continued, without giving details on what the steps would be.
After Trump announced the tariffs, the lira fell down almost 18 percent at one point, which was the biggest drop in a day for Turkey since 2001. President Erdogan believes this drop in the currency’s value is not due to economic reasons but is a plot against his country. “What is the reason for all this storm in a teacup? There is no economic reason… This is called carrying out an operation against Turkey,” he said. He also urged the Turkish citizens to sell the dollar and buy the lira, which will help boost the currency. “I am specifically addressing our manufacturers: Do not rush to the banks to buy dollars… You should know that to keep this nation standing is… also the manufacturers’ duty,” he said. Despite these words, however, the lira was at 7 to the US dollar on Monday, which was a 9 percent fall on Friday’s closing price. This fall in the value of lira is being blamed on fears that Turkey is tumbling into an economic crunch.
According to Andrew Walker, the BBC World Service economics correspondent, the stock market has fallen by 17 percent while borrowing costs of the government have mounted to 18 percent a year. In the interim, inflation has also risen to 15 percent. Investors also worry that companies that had previously borrowed heavily to profit out of a construction surge might struggle to repay those loans in dollars and euros, as the enfeebled lira means there is now more money to repay. Asian stock markets were also down on Monday. The Nikkei in Japan lost 1.6%, Hong Kong was off 1.8%, Sydney was down 0.5% and the Taiwanese bourse fell 3%. The FTSE100 was expected to open down 0.4% laster on Monday morning while Germany’s Dax 30 was set for a 0.8% fall. The euro hit one-year lows on Monday as the falling lira fuelled demand for safe havens, including the US dollar, Swiss franc and yen. The Vix volatility index measuring turbulence in financial markets – also known as the fear index – jumped 16% to 13.6 on Monday.
Chris Weston, of online trading firm IG Market in Melbourne, cautioned that global markets would be on edge as investors tried to evaluate the bearing of the crisis on European banks which have lent money to Turkey.“The European Union’s financial watchdog [has] expressed concern about EU financial exposures to Turkey. And so, if it is a concern for this institution, then it should be for traders too,” he said. Analysts at ANZ bank in Australia said contagion risks centre on Spanish, Italian and French banks exposed to Turkish debt, as well as Argentina and South Africa. “Turkey’s massive pile of corporate debt denominated in foreign currencies, but a rapidly sliding currency – and inflation that’s threatening to go exponential – is a toxic combination.”“The plunge in the lira which began in May now looks certain to push the Turkish economy into recession and it may well trigger a banking crisis. This would be another blow for emerging markets as an asset class, but the wider economic spillovers should be fairly modest, even for the eurozone.” said Chief global economist at Capital Economics, Andrew Kenningham.
The two countries have been at odds ever since they came up with their respective futile plans to extradite an individual each from the other’s country, both of who have been accused of plotting a coup that could overthrow the Turkish Government.
*Neha Hardikar is a Research Intern at The Kootneeti
