Steep rise in dollar puts Turkish real economy in distress
Posted by meb at October 23rd, 2008
The Turkish lira’s drop against the sharply rising US dollar in recent days has led business owners who rely on the parity of the currencies in their international monetary transactions to call on the central bank to intervene in the market by injecting liquidity into the finance sector and by adjusting interest rates.
Analysts say that while Turkish exports may benefit from the weak lira, it is also likely that the shrinking economies abroad may curtail this trend. The prime example is the automobile manufacturing sector in Turkey. The shrinking market in Europe has led to a sharp 49 percent decline in Turkish car exports to Europe, Mehmet Büyükekşi, president of the Turkish Exporters Assembly (TİM), said yesterday. Exports to the US market fell 4 percent in the first eight months of 2008 compared to last year, he added. The developments are most worrisome for Turkish importers, who rely on foreign raw materials. Industries that rely heavily on foreign products, such as fertilizer and petrochemicals, will likely face serious challenges in the market.
The price hikes in imported goods will be passed on to consumers. The Turkish lira fell sharply against the dollar to a 27-month low yesterday as investors continue their sell-offs of local currencies in emerging markets. The lira traded at above 1.64 to the dollar in early morning trading yesterday. Bond yields also rose and stocks fell almost 4.11 percent yesterday.
Sudi Apak, a retired professor, told Today’s Zaman that the dollar’s recent gains over the YTL will have negative effects on the non-financial sector. He said the private sector currently has $40 billion in debt and that the burden on indebted companies will further increase. “Turkish exports will be badly affected by this fact, and the foreign trade deficit will grow, leading to an increase in the current account deficit as well,” he explained.
Apak underlined that foreign capital inflow had also decreased dramatically in recent months and that the government should focus on attracting the investments of Turkish citizens living abroad. He stressed that Central Bank of Turkey should increase the interest rate for Turks working abroad who invest funds in the bank’s accounts. The interest rate was recently reduced by the bank to 1 percent from 7.5 percent. Apak also touched upon the importance of cooperation between government bodies in producing effective solutions.
Professor Seyfettin Gürsel of Galatasaray University noted that the recent increase in the value of the dollar came as a real shock to Turkish markets. Speaking to Today’s Zaman, Gürsel underlined that if the increase continues for long, domestic markets will face unavoidable shrinkage. “First of all, inflation may increase by 6 points at least,” he said, stressing that the central bank will then have to increase interest rates. In addition, he stressed that the price of imported products will increase in the domestic market and that this will lead to a decline in foreign investments. He warned that many small and medium-sized enterprises (SMEs), who export in low amounts would go bankrupt in the long run. “All in all, the more the dollar gains value, the worse things will get for the non-financial sector,” he said.
Sevgi Aytekin, currency desk manager at Akbank, said the central bank will intervene if it thinks such a move will be effective. Recalling the intervention in 2006 when the central bank collected US dollars from the market in bulk through direct purchase, she said she could not predict whether the bank would do the same this time.
Inan Demir, chief economist at Finansbank, said, “Countries with huge current account deficits like Turkey are adversely impacted by the dollar’s valuation.” Turkey has a current account deficit of $47 billion, or 6.4 percent of gross domestic product (GDP). Demir said it is very difficult to make predictions when the dollar’s value is so volatile.
“The rise of the dollar’s value in Turkey is mostly due to its rise against major foreign currencies,” he said, stressing that emerging markets are more impacted by this trend. He also pointed out that the rumors of the likely failure of the Argentinean economy had added extra uncertainty in the market and that investors are scrambling to find safe havens for their funds. He also cautioned against buying dollars right now because the currency’s value is so high.
Demir noted that the government needs to take measures to prevent further escalation of this crisis. “On the top of the list comes securing a deal with the IMF [International Monetary Fund],” he said. He estimated that the pressure on Turkey, as well as on other emerging markets, will keep going and that the dollar may rise even further. He said the Central Bank of Turkey can intervene in the market through interest rates to regulate currency movement.
“We are forecasting a credit package totaling between $16 and $20 billion in the latest IMF agreement. An agreement that would enable the use of funds as required would be beneficial,” Arzuhan Dogan Yalcindag, chairwoman of the Turkish Industrialists and Businessmen’s Association (TÜSİAD), said on Tuesday. “The IMF agreement should not be perceived as a weakness. … An IMF agreement is more important now than it was six months ago,” Yalcindag added.
Hedge funds are closing their positions to liquidate their assets and this contributes to the dollar’s rise, said Tolga Senefe, a top executive at Anadolu Bank. “The dollar has reached sufficient levels for the central bank to intervene. The markets are expecting the central bank to step in,” Senefe explained.
Analysts say the euro is being pressured by speculation that the European Central Bank will be forced to lower official borrowing costs to promote growth. “The euro is being hit by concerns that the Eurozone economy will be impacted by deteriorating economic conditions in the surrounding emerging markets,” said Shuichi Kanehira, a senior trader at Mizuho Corporate Bank in Tokyo.
The sterling was down 0.8 percent at $1.657 after falling as low as $1.651, its lowest since September 2003. Bank of England Governor Mervyn King said on Tuesday that Britain’s economy is probably entering its first recession in 16 years.
Turkish Union of Chambers and Commodity Exchanges (TOBB) President Rifat Hisarcıklıoğlu said yesterday that Turkey is feeling the impact of globalization in the current crisis. Noting that Turkey is better prepared to face the crisis than it was eight years ago, Hısarcıklıoğlu said the important thing to watch is the behavior of Turkish consumers. “If we panic and act alarmed, commerce will halt,” he said, adding, “The blood of the economy is liquidity and money flow.” He cautioned that the Turkish economy will dive into a crisis if the money flow into the economy stops.
Tourism Investors Association (TYD) head Koray Yetik told reporters yesterday that the real economy has started to feel the impact of the credit crisis. “We will get a better and clearer picture of how this crisis has impacted our industry in the coming days,” he said.
source: Today’s Zaman
Related posts: