Turkey

History
 Turkish Central Bank has cut interest rates by five percent. Exports actually
increased and there was a current account surplus for October.
 Actually, Turkey’s economy grew which looks good for Turkey. But then,
Turkey started to become less attractive. People started pulling money out which
starts to drop in value. Maybe, these are suggestions that erred against theories that
could be working.
 The investors expect 14% inflation to turn to 26%  The expert puts a lot of
pressure on the average Turkish citizen. A lot of people in Turkey are suffering.
People who borrowed money to makr business, like US dollars.
 Now, the lirahas gone down so they must earn a lot more lira to pay back the
US dollar loans.
Problem
Inflation is very high, low interest rates ( Turkey lira has been in free fall
ever since Central Bank )  Because Central Bank was under pressure preventing
the government from making the necessary interest rate adjustments  Contribute
the pressure in Turkish Lira.
The Lira is continuing to weaken and massive foreign debt is increasing.
 President Erdogan urged Turkish citizens to us foreign currencies and
gold to buy Lira to fight with the other countries in economic war  Tausurkey’s
lira has been going down, it is not lost 50% of its value.
Rising borrowing costs and loan defaults.
Current account delicit and foreign – currency debt.
 Orthodox accepted economic ideas would say  when there was the
economic downturn in America. The Federal Reserve in Amercican cut interest
rates down really low. So people could borrow money really cheaply in America.
They were getting cheap money from America and going to places like Turkey.
So, the people who would borrow money and use it to develop Turkey.
Reason
Presidental interference with the central bank
- Central bank still made a sharp interest rate increase despite the rejection of
Erdogan .
- The president’s theory is that high-interest rates are not as good as low-
interest rates. They will stimulate the economy. This is a different idea to
generally, accepted economic theories whereby to control inflation.
- The president is not only dropping interest rates but also raising the wages
of people which is opposite to traditional economic theories should be happening.
When the central bank raise interest rates that make slows down the demand and
inflation will drop. Because more people will be attracted to saving rather than
spending.
Wage increase
The wage increase has unticipated the problem for people in Turkey. One of
the problems with inflation is wage price spiral. The wage price spiral is that prices
go up for some reasons. The people who are working, they suffer from this. When
they get a wage increase the product that they are making in a factory. The owner
of that factory has to increase the price of his product o cover the wage increases.
The price of a product goes up then the workers all go up the wage, too. Turkey the
workers have money. They will go and buy things. There could be increased
demand thereby.
High expectation
The investors expect 14% inflation to turn to 26%  It means the economic
growth could not be sustained and then it started to come down, the lira drops in
value.
Consequences in Turkey
Due to the loss of earnings in Turkish lira  A lot of people in Turkey are
suffering. People who borrowed money to make business, like US dollars. Now,
the lira has gone down so they must earn a lot more lira to pay back the US dollar
loans  Lender in Turkey is unable to serve their USD and EUR denominated
delit. For example, if a Turkish citizen borrows a hundred thousand dollars and
Lira drops 50% against the US dollar. They effectively have to pay back 150 000
US dollars. It means you must repay more expensive loans.
The asset quality of Turkish banks, as well as their capital adequacy ratio,
kept deteriorating throughout the crisis.
Banks continously heightened interest rates for business and consumer loans
and mortgage loan rates  Decreasing demand from businesses and consumers.
International consequences
 The crisis has brought considerable risks of financial contagion.
 One aspect concerns risk to foreign lenders, where according to the Bank for
International Settlements, international banks had outstanding loans to Turkish
borrowers
 Another aspect concerns the situation of other emerging economies with
high levels of debt denominated in USD or EUR, with respect to which Turkey
may either be considered “a canary in the coalmine” or even by its crisis and the
bad handling thereol increase international investors’ retreat for increased
perception of risk in such countries.
 The fall of the value of the lira has also impoverished the inhabitants in
northern Syria, who use the lira for everyday transactions.
 Impacted the hazelnut industry hard, which is economically important in the
country and produces 70% of world’s hazelnuts.
Advice
At the moment, Turkey is pretty much bankrupt. It is got a negative balance
in the bank. Its exports are probably earning mire Lira but they need to borrow
money from somewhere like an international monetary fund. The IMF will come
in and they tell the country what to do. They take over economic control of the
country like cutting interest rates, expenses, government services education, social
welfare health, ect. The austerity of everyone has to suffer a little bit and gradually
the economy will improve. Nevertheless, it’s probably very reluctant to go to the
IMF because he knows that his economic policies will be thrown out in favour of
more acceptable economic policies. Therefore he’s running around, looking for
money from the United Arab Emirates and wherever else is willing or wants to
enter money.