August 14, 2018

THERE'S NO SUCH THING THING AS MUSLIM ECONOMICS:

Erdoğan Tilts at Windmills as Lira's Decline Continues: The central bank took steps to halt the slide of the currency--but stayed mum about raising interest rates (KRISHNADEV CALAMUR, AUG 13, 2018, The Atlantic)

Although the lira's decline stemmed from a number of factors, the actual chain of events leading to the crisis is fairly straightforward. Turkey's economic growth came on the back of low interest rates and foreign capital. The low rates allowed Turkish companies to borrow money cheaply to finance projects. But corporate debt swelled to 70 percent of gross domestic product--one of the highest shares among major economies. Much of this borrowing was done in foreign currencies like the U.S. dollar--not in liras. This factor is one reason why Turkey's broader economy could be vulnerable as the lira continues to slide. The loans incurred by Turkish companies in U.S. dollars and other foreign currencies will now be more expensive to repay; profits will also be hit because of the depreciation.  

"This is a foreign currency crisis in its origin, but given the reliance of Turkey--both in the government and corporate sectors--on external finance, this could turn into a debt crisis which engulfs its banks," Hasnain Malik, the head of equity research at Exotix Capital, said Monday in a research note. "Because of the high participation of foreign banks and portfolio investors in Turkey, there are clear risks of contagion."

Investors would like to see Turkey's central bank raise interest rates (its benchmark rate is at 17.75 percent), address inflation (which is at 16 percent), and engage with multilateral lenders to keep the crisis from spreading. Erdoğan, however, has railed against higher interest rates. Turkey's central bank has stayed mum on rates, casting doubts about its independence. Erdoğan's appointment of his son-in-law as the country's finance minister hasn't inspired confidence either.   

Economists worry that Turkey's troubles could cause investors to start pulling money from other emerging economies. Other currencies fell Monday against the U.S. dollar, including the Indian rupee, which hit a record low, and the South African rand. Markets in Asia and Europe fell as well on Monday before recovering.



Posted by at August 14, 2018 4:11 AM

  

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