Shatha Khalil *
The growing dispute between Turkey and the United States, raising the import duties of aluminum from Turkey to 20 percent, and steel fees to 50 percent have led to the decline and deterioration of the value of the Turkish lira against the dollar.
The dollar exchange rate was less than 2 lira for a long time, but the dollar has risen against the Turkish lira gradually, beginning in the year 2000 and 14, and the dollar has reached the equivalent of three Turkish liras at the height of the failed coup attempt in July 2016, , and rose to reach 4 lira and to five lira, then six lira, and continue to rise to record today, Monday, 13th of August 2018 , a new record low at seven lira and twenty-four part of the lira, in early trading in Asia and the Pacific Ocean as pressure on the currency continued as investors worried about the state of the economy and the deterioration of relations with the United States, which referred to by the Turkish Minister of Finance when he said: The current decline in the lira is a clear attack on Turkey. ”
This decline in the value of the Turkish currency could strengthen the pressure on the Turkish banking sector, because the volume of lending is large, and more than a third of it in foreign currencies, which carries great risks to the economy in general, and the banking sector in particular.
This crisis has only reached its peak in recent weeks, and the reason is the serious diplomatic dispute with the United States, which broke out earlier this month, over the trial of American Pastor Andrew Brunson on terrorism-related charges, reflected the decisions of foreign investors in Turkey to freeze it.
The deterioration of Turkish-US relations has caused a heavy blow to Turkish financial assets, leading to a rise in the cost of insurance on Turkish debt to its highest level since 2009 with a strong rush on the sale of the Turkish lira and sovereign bonds and banking.
Turkey’s five-year credit risk swaps rose to 370 basis points, up 14 points, with the Turkish lira falling more than 2 percent, a low .record rate as the Turkey’s sovereign bond yields denominated in dollars above US Treasuries were higher Levels since April -2009 , with declining of the issues of bonds of various benefits.
Inflation, the biggest problem in the Turkish economy, has now risen, close to 13 percent, the highest in 14 years.
Turkish Financial Policy:
Turkey is following two completely conflicting financial policies, the first being adopted by Erdogan, namely the need to reduce interest rates so that investments increase, export increases and the unemployment rate decreases. The other is the policy of the Turkish Central Bank, which is based on raising interest rates to maintain the attractiveness of the Turkish market then the continued flow of hot money. Although the Turkish president’s economic logic is theoretically correct, his moves are offset by a continuous collapse of the lira, which raises a great question, especially since his point of view is economically sound.
Turkey is heavily dependent on external borrowing, making the relationship between the lira and the dollar, cautious and fearful, of increasing US interest rates under Donald Trump’s presidency, which means raising US interest rates, ie, increasing the cost of borrowing to Turkey restricting its credit access to foreign funds which can reasonably cause the collapse of the Turkish economy, and in a quick succession, it is enough to restrict external credit, block access to external capital markets, and the existence of corporate debt, the biggest source of risk noting over the past decade, the Turkish non-financial companies have devoured huge debts in foreign currencies , led by the dollar at record rates , making the rates by which the companies ranked second for the largest dept of non-financial companies in the world after the Chinese companies , however , the Central Bank of Turkey announced at the end of 2016 that the debts of Turkish companies in foreign currency amounted to about two hundred and ten billion dollars, while the rollover ratio amounted more than one hundred and sixty percent, which tells us that Turkish companies are unable to stop borrowing, otherwise they will face bankruptcy, because the rollover ratio means that every hundred Dollars owed to these companies requires to borrow another $ 100 to finance its payment, plus another $ 60 on them.
In this regard, the Turkish Ministry of Finance announced at the end of March the total foreign debt of Turkey amounting to 453.2 billion dollars, which exceeds half of the gross domestic product, while the share of government debt of these debts, more than half by the end of December, levels which the Turkish economy has not reached since 2003.
Hot money destroys the Turkish economy:
Hot money is a concept used in recent times in some emerging economies, leading to a state of instability in the local currency exchange rate and financial markets, refers to the flow of funds (or capital) from one country to another in order to earn a short-term profit on interest rate differences or anticipated exchange rate shifts , the reason for this designation is the rapid movement of funds within and outside markets, which may lead to a state of market instability.
The hot funds are not aimed at long-term investment, or stay in place, while giving the impression that conditions are good, with the aim of raising the prices of stocks and bonds and making investors in the financial markets feel that things are going well, then, all are heading to buy them leading to the rise of prices in an unjustified way and a bubble is created that quickly explodes, when the owners of those funds decide to sell their shares and bonds at high prices, after buying them at cheap prices, to get behind this process huge and quick profits , and bring them out of the economic cycle.
The dependence of the state economy on hot money is dangerous enough, because of the ability of these semi-permanent funds to perceive the danger, and its rapid release from any political or economic turmoil, not only within the concerned country but also in its regional and global environment, and the Turkish economy depends in a large ratio on those short-term capital flows since the deregulation of capital movements in 1989.
The Turkish economy depends on capital concentrated in non-productive sectors, such as banks, stocks and bonds, and the purchase of assets that can be speculated and exited from it quickly. Perhaps the real estate boom that took place in Turkey, which Erdogan calls to complete it was one of its results, while the Turkish government should focus on attracting long-term direct investments, which are pumped into factories mainly to increase industrial production, and thus create additional real value , acting as a solid balance sheet, so that the Turkish economy is not affected by the exit or entry of hot money.
High Beta Economy
Turkey is a type of economy called the “high-beta economy”, which means that when the outlook for the global economy is brighter, with a wide margin of risk to investors for various reasons, the money flows to Turkey in search of high investment returns, This raises the value of the lira against the dollar, but when investors fear, hot money is withdrawn from Turkey faster than any other country (the cause), pushing the lira to a rapid and continuous decline.
In a study published in the International Journal of Trade and Social Research in the year 2016 regarding the impact of hot money on the Turkish economy between 1991 and 2014 , it revealed the reality of this intertwined situation., and the study noted that since deregulation on the movement of capital in the late of 1980s, the hot money was flowed into the Turkish interior, causing increased demand, growth and monetary expansion, and these recent results , which seem positive , took the Turkish economy to negative results. The study also noted that the three crises that occurred during the years (1994, 2001-2002, 2008) , they all have a great deal of flow of Hot money, as the hot money flowing to fund the shortfall, is short-term financing, speculative movements, and thus only creates temporary stability that does not last indefinitely.
The study also warned against a serious outcome, which is the basis of understanding the nature of the Turkish economy where the decline in foreign direct investment is a real problem, noting that despite the increased inflow of capital, the examination showed that the share of foreign direct investment was small compared to the volume of hot money, and economic decision-making mechanisms must therefore support the increase of foreign direct investment, employment and exports.
In the same context, the Central Bank of Turkey is suffering from the intervention of Erdogan in monetary policy, raising interest rates by 3% to 16.5%. He reassured investors, through his commitments, of Turkey’s commitment to respect the universal principles of monetary policy.
The International Monetary Fund (IMF) said that despite the sharp drop in the Turkish lira, it had received no contact from Turkey for financial assistance due to the sharp decline in the Turkish lira during the past period although the borrowing option is possible to ease the crisis but it is difficult to be accepted by Erdogan, who brags constantly on being able to repay Turkey’s debt to the IMF.
Euro Falls Against Dollar:
Due to the concern about the Turkish economy and the exposure of major European banks to Turkey, the euro has been declined against the dollar to its lowest level in more than a year , however, the euro reached $ 1.14, the lowest level since July 2017.
In a report to the Financial Times, the ECB is concerned that banks in Spain, Italy and France may be adversely affected by its exposure to the Turkish economy. The Turkish lira has fallen to 18 percent due to monetary policy in the country and tensions between Ankara and Washington.
Against that, the euro also fell against the Japanese currency “Yen” by (1.56%) yenahs , amount (126) yen, the lowest level in more than two months.
European stock markets fell after the sharp decline in the Turkish currency, following the decline in the shares of major European banks such as the Spanish BPA and Italian Unicredit on the Turkish market, which means the weight of the volume of financial relations with Turkey.
The stock 600 index of European shares fell 11% while German stock index DAX fell by( 2%) and the shares of French BNP Paribas, Italian Unicredit and Spanish BPY are fallen by : (3%, 4.7%, 5.1%), respectively.
A macroeconomic policy analyst at Pol- Tek Company for brokerage, Gregg Anderson said “The exposure to the Turkish market will affect European banks, and it will have a domino-like effect across European countries, which led people to avoid banks that are exposed in Turkey,”and the investment in US banks, which pushed the dollar to rise.
Economic Studies Unit
Rawabet Center for Research and Strategic Studies