“The model outlined by the new finance minister today is good in principle. He touched on important issues like the need to slow down growth, the importance of financial stability and central bank independence. But there’s no escaping the fact that it lacked the kind of detail that will calm markets. US authorities doubling tariffs on Turkish steel and aluminium exports to the US has just poured fuel on the fire.
“There’s some positive words in this plan but we really need to see action now from Turkey. The situation isn’t irreconcilable. The short term solution is simple: raise interest rates aggressively and rein in credit to cool down the economy and bring inflation into check. Send a clear message to investors that the problem is understood and will be decisively addressed.
“Most of the economic pain that Turkey is experiencing is self-inflicted. Turkey has proven time and again that it cannot sustain high levels of growth without issuing more debt. Given domestic savings are so low, this debt is in US dollars and has the inherent exchange rate risk that comes with it. So it is no surprise that the monetary and credit stimulus that followed the failed coup in 2016 has led to a rapid widening of the current account deficit, inflation getting out of control and the country on the brink of a currency crisis.
“Authorities will have to raise rates sooner or later – they don’t really have any other option – but the situation has got so out of hand that they are going to have to go much further than they would have had to even just three weeks ago. Underneath all of this, Turkey is still a place of great potential. The broader economy in reasonably diversified with a decent export base. But the question right now is about credibility and the only way to retrieve the situation in the short term is to act.”