News Analysis: Turkey's economic woes amplified by Fed's rate hikes

0 Comment(s)Print E-mail Xinhua, June 23, 2022
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by Burak Akinci

ANKARA, June 22 (Xinhua) -- Consecutive interest rate hikes by the U.S. Federal Reserve to rein in its domestic inflation will deal further blows to Turkey's economic woes, analysts said.

On June 15, the Fed raised its benchmark interest rate by 75 basis points, marking the sharpest rate hike since 1994, as it races to fight inflation that is running at a multi-decade high. It also left the door open for a similar increase in July.

The latest move of the Fed has put elevated pressure on emerging economies such as Turkey, which is wrestling against skyrocketing inflation, a declining currency, and dwindling foreign currency reserve, analysts said.

"The Fed's rate hikes will accelerate currency fluctuation and increase the appetite for the dollar. This move will be detrimental to emerging markets, especially Turkey, which will be more affected because of its depreciating currency," Enver Erkan, chief economist at Istanbul's Tera Securities, told Xinhua.

After a dramatic plummet in 2021, the Turkish lira continues its downward trend and has lost over 20 percent of its value against the U.S. dollar over the past six months.

The Turkish government introduced measures to prop up the lira in December, however, the Russia-Ukraine conflict and the subsequent surge in the global price of food and commodities once again accelerated the lira's plunge.

Baki Demirel, associate professor of economics at Yalova University, told Xinhua that the dollar's appreciation against the lira has also eroded Turkish's foreign reserves, noting that the import-reliant country's foreign reserves are already at a record low, which causes concerns for a looming foreign debt default.

"Turkey has to repay some 182 billion dollars in the short term. As the reserves run low, borrowing costs are going up for the country," Demirel said, adding that he believes that Turkey's "capacity to repay its debts is decreasing."

"Turkey's issues are certainly amplified by the Fed's move. It's not only Turkey. All emerging markets' vulnerabilities are amplified by it, without doubt," he said.

Erkan said he anticipated the lira to drop further because the Fed is likely to continue its hawkish stance against the U.S. inflation.

"The Fed could move towards another 75 basis point rate hike in July. Markets are expecting such a scenario. At least a 50 basis point hike is certain. There will be easing in the future but estimations are that the U.S. interest rates will be around 3.5 percent at the end of this year," Erkan said.

This will cause more damage to the lire, the economist said, adding that the U.S. monetary policy is set to further decrease the purchasing power of Turkish households. Enditem

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