Roundup: Turkey faces challenge from U.S. monetary policy: experts

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ANKARA, March 29 (Xinhua) — Moves by the United States to maintain its loose monetary policy until at least the end of 2023 and its massive relief package, pose a challenge to emerging markets (EM) such as Turkey, economists said.

The U.S. stimulus measures have forced central banks of some emerging markets to raise interest rates due to rising inflation pressures.

“A strong dollar is a challenge for EMs, including Turkey which is under the grip of turbulence” following the sacking of the central bank’s chief, Turkish economist Baki Yildirim told Xinhua.

The abrupt firing came two days after the central bank went for some shock therapy on March 18, bringing in a “front-loaded” policy rate (one-week repo) hike of 200 basis points to 19 percent.

Yildirim argued that the Turkish turmoil may have a contagion effect among other developing countries, made more vulnerable with the Federal Reserve’s recent policies.

The sudden change in Turkey’s monetary policy leadership came during a fraught moment for emerging markets, which have been under pressure as borrowing costs in the United States and other developing markets have climbed higher.

Yildirim, assistant professor at Yalova University, said the 1.9-trillion-U.S.-dollar COVID-19 relief package comes as a risk for EMs as it could trigger capital outflows from developing nations amid rising U.S. bond yields.

“Turkey didn’t see yet an external shock in this current turbulence,” commented Yildirim who believes that conditions may be worsened for Turkey and other emerging nations when the United States decides to move towards a tightening monetary policy in 2023.

A Turkish banker told Xinhua that the U.S. monetary policies had exacerbated global excess liquidity, resulting in large-scale inflows of “hot money” into emerging markets.

Such inflows can be rapidly withdrawn, causing significant turmoil for investors in emerging nations, such as Turkey, where this situation has been recorded several times in the past, he warned.

Hot money continuously shifts from countries with low-interest rates to those with higher rates. These speculative financial transfers affect the exchange rate and potentially impact a country’s balance of payments.

Turkey’s government and corporate sector have borrowed heavily in foreign currency, primarily in euros and dollars. That debt gets difficult to service with a plunging lira which has lost over 10 percent of its value after the removal of the central bank’s head.

Some other developing economies are facing a similar scenario in which inflation is going up and their currencies need to be propped up, the banker remarked.

While a stronger dollar benefits the U.S. administration, it is a real burden for EMs, resulting in lower real income and decreased demand for EM commodities, exporters, remarked Yildirim.

The U.S. stimulus is boosting the outlook for growth and inflation, driving up bond yields and prompting investors to sell emerging market assets.

“Turkey’s problem for the moment is domestic, it has a credibility problem regarding how it will continue its monetary policy,” remarked another banker, adding that it is also an emerging market and faces the challenges that other EMs are witnessing. Enditem

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