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Turkey in a week (14-27 August, 2018)

After the “Black Friday” of Turkish Lira on August 10th, which saw 30% of loss in the currency’s value in just one day, on Monday August 13th, AKP government had to take some steps in a desperate need to stop Turkish Lira’s free fall. Turkish Lira was already the world’s worst-performing currency, dropping by almost 60% against the dollar in the past 12 months by 27th of August. The measures Turkish Central Bank and Capital Markets Board of Turkey took helped Turkish Lira to regain some its loses and stabilised at 6 TL against US Dollar just before the week long religious holiday.

The chaotic 10 days closed with downgrades from the two rating agencies and the country went to a 10-days holiday. S&P Global Ratings on Friday 17th, lowered Turkey’s long-term foreign currency sovereign credit rating to ‘B+’ from ‘BB-‘ with a stable outlook. Moody’s Investors Service also downgraded Turkey’s sovereign rating to ‘Ba3’ from ‘Ba2’ and revised the outlook to negative. For Turkey’s advantage, both decisions came after the markets closed allowing Turkish citizens to go on holiday without further deprivations in their purchasing power. The downgrade decision of S&P was based on “the extreme volatility of the Turkish lira and the resulting projected sharp balance of payments adjustment”. S&P Global also projected the Turkish economy to sink into a recession in 2019 even as inflation accelerates to 22% in the next four months. The ratings agency also reminded that `\”the weaker lira is putting pressure on the highly indebted corporations and raised the funding risk for Turkey’s banks.”. Moody’s draws attention to “the continuing weakening of Turkey’s public institutions and the related reduction in the predictability of Turkish policy making”, particularly referring to the concerns for the independence of the country’s central bank. The statement from Moody’s further reads “The tighter financial conditions and weaker exchange rate, associated with high and rising external financing risks, are likely to fuel inflation further and undermine growth, and the risk of a balance of payments crisis continues to rise”.

As a rule, Erdoğan does not like to accept responsibility for any failure, so it was no surprise when he kept blaming the lira’s dramatic decline on an international conspiracy and appealed to his people to fight against a supposed “economic war”. Erdoğan’s preference to read the situation in diplomatic, rather than economic terms lead Turkey to search for other partners.

Erdogan had phone conversations with Russia’s Vladimir Putin and Germany’s Angela Merkel. But the most helpful contact was with the Qatari emir, Sheikh Tamim bin Hamad Al Thani, who flew to Ankara in a show of support. Qatari Emir promised that his country would invest US$15 billion. This is not the first time Qatar reaching out to Turkey. Last year, when Turkey was also in a currency crisis, Qatari Emir promised to invest US$20 billion, though there has been scant news about it since that time. As a first step of this 15 billion Dollar investment promise, the heads of Qatar and Turkey’s central banks have signed a currency swap agreement to provide liquidity and support for financial stability. The Turkish central bank said on a statement that the currency swap agreement between the Turkish and Qatari central banks will have an overall limit of $3 billion. The objective of the deal is revealed to facilitate bilateral trade in local currencies and support financial stability. President Erdogan has said several times that Turkey should try to conduct trade agreements with its trade partners enabling the country to use local currencies rather than dollar. Pro-government media reported that Turkey tries to come to a trade agreement with Russia for using local currencies for their trade. However, experts and observers warn that using local currencies instead of a reserve currency such as US dollar and Euro can only be possible with the countries having mutually balanced trade accounts.

The last news from Turkey just before the holiday was the retaliation from Turkey to US. Turkey announced that it was doubling tariffs on a number of products imported from the United States, including passenger cars, tobacco and spirits. Turkish Vice President Fuat Oktay’ statement reads “They are increased under the principle of reciprocity in response to the US administration’s deliberate attacks on our economy”.

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