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Just three weeks ago, President Recep Tayyip Erdogan was confirmed in office. Thanks to a constitutional reform, he now has more powers than in his previous mandate. He also knows how to profit from economic policy: On Tuesday, it was announced that Erdogan alone would determine the central bank's monetary policy committee. His son-in-law Berat Albayrak is the new Minister of Finance
Erdogan has attracted attention with his "unorthodox" economic views. He argues that high interest rates fuel inflation and that continued depreciation of the lira is orchestrated by foreign powers. At the central bank and cabinet, he now has his hands free to put his ideas into practice. The two ministers who will replace Albayrak – Naci Agbal and Mehmet Simsek – were "the few representatives of an orthodox economic policy," say badysts at the research house Capital Economics
Interest rates will likely remain low and economic growth will be artificially high. outfit. The rating agency Moody's doubt Turkey's willingness to tighten its monetary policy in the coming months. On Thursday, Erdogan also said that interest rates will decline.
Elections make change of course improbable
Citigroup badysts ( C 67 -2.2% ) indicate elections in March 2019. Politics should take the lead. But this is unlikely because of the elections. In a good environment for emerging economies, it is feasible for the government. But the country is vulnerable – a continuation of the current course is therefore risky.
The low interest rate expectation had quickly prevailed in the financial markets this week, as you look at recent price movements.
The Turkish lira this week devalued to a new low record against the dollar. Since the beginning of the year, the value date has lost a good 23% of its external value. Shortly after the election of Erdogan, there was a slight resumption of the read. It was probably badumed that the re-election of the president would bring stability. It was finished quickly. This week alone, the lira lost nearly 6% – the biggest weekly loss of the last decade.
Currency Risk
Devaluation has two direct effects painful effects. On the one hand, import prices rise when the pound depreciates. This increases inflation. On the other hand, it will be more expensive to pay interest and repayments on foreign currency debt.
According to an badysis of the Institute of International Finance, Turkey is particularly vulnerable to foreign currency loans. Businesses and the financial sector have been particularly heavily indebted. In addition, the risk of refinancing is high. For 47% of debts borrowed in dollars, lenders should be found by the end of next year.
Currency Debt
Turkey Has the Highest Currency Debt of Emerging Economies
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