Turkey raises rates amid emerging-markets meltdown
The Turkish lira trimmed its rally against the dollar as investors said they were seeking more detail from Treasury and Finance Minister Berat Albayrak about plans to shore up the lenders and address debt repayment issues for the nation’s companies.
The lira, which surged almost 2 per cent after Albayrak announced revised economic targets, trimmed gains to 0.7 per cent against the dollar as of 12:45 a.m. in Istanbul. Speculation had been building that authorities would announce a plan to help banks tackle a buildup of bad debt on their balance sheets amid a currency rout that’s knocked 40 per cent off the lira’s value this year.
Investors said plans to restructure the Development Bank of Turkey and the Real Estate Bank of Turkey also raised concern that the government could stick to some expansionary economic policies. Runway growth over the past year has compounded the economy’s imbalances by inflating the current-account and budget deficits, fueling double-digit inflation and leaving the lira exposed to rising interest rates in the U.S. and a resurgent dollar.
While the currency stabilized after the central bank hiked rates by 625 basis points last week, many said they were looking for signs of further policy action on Thursday. The currency got a lift on the government’s new growth forecasts, which suggested authorities aren’t planning any major stimulus programs, and were committing to tighter fiscal policy and financial stability over pro-growth measures.
“Front and center has to be evidence the government gets the challenges in the banks,” Timothy Ash, a strategist at BlueBay Asset Management in London, said before the speech. “The urgent need from the authorities is to be open about the problem, and through innovative solutions like a bad bank, help banks clean up their balance sheets.”
The revised forecasts showed growth slowing to 3.8 per cent in 2018 and 2.3 per cent in 2019. The latter figure is still significantly more optimistic than the estimate by the Organization for Economic Cooperation and Development, or OECD, which sees Turkey’s expansion at just 0.5 per cent next year. The Turkish economy expanded 5.2 per cent in the second quarter of this year and 7.3 per cent in the first quarter.
Albayrak’s plan showed that the government has “acknowledged the problems" and market response will now depend on implementation and discipline, said Anastasia Levashova, a fund manager at Blackfriars Asset Management in London. “Now it is all about credit contraction, debt repayments and restructuring and deleveraging - which will undoubtedly will be painful and lengthy."
--With assistance from Cagan Koc, Onur Ant and Firat Kozok