Turkey faces a huge jolt with rocketing inflation, a sharp economic slowdown and distress in the banking sector after abandoning its exchange rate peg, experts said Thursday, February 22.
The lira plunged 30.5 percent to 991,000 lira to the dollar from 689,000 lira the previous day after the pre-dawn decision, taken in the face of a massive outflow of funds.
"It is a very serious shock, one should not minimize it," said Val Koromzay, Organization for Economic Cooperation and Development (OECD) economic director for country studies. "It is certainly extremely negative for inflation," he said. Inflation was running at 39 percent last year but the government had targeted a rise of just 12 percent in consumer prices in 2001.
"In the short term, you have an income effect, a wealth effect, because the Turkish lira's value of the foreign debt exposure increases," the OECD expert added. Turkey had been trying to shore up the banking sector, Koromzay noted. "Now they will clearly have a bigger problem," he said, adding that many of the banks had bought large stocks of high-yielding investments denominated in Turkish lira.
The pegged currency rate was a key element of a three-year four-billion-dollar stand-by deal with the IMF that Turkey began implementing in December 1999 to reduce its chronic inflation.
A banking crisis then erupted in November, leading the IMF to provide a $10-billion rescue package to stave off devaluation in exchange for government promises to accelerate privatization and reform banks.
London-based credit rating agency Fitch ICBA, which downgraded Turkey's long-term local currency rating, said the country had now moved into "uncharted territory." "Drawing on its experience of the Asia and Brazil crises, the agency believes the exchange rate will overshoot by a wide margin, forcing interest rates and inflation to potentially new highs and rendering budget projections for 2001 wholly obsolete," it added. "Henceforth, the evolution of Turkey's sovereign credit ratings will hinge critically on the government's ability to regain control of events."
Prime Minister Ecevit had stormed out of a key meeting Monday, February 19, after a row with President Ahmet Necdet Sezer over ways to fight corruption, triggering fears of political instability.
As the peg came under question, Turkish banks rushed to sell their local currency for dollars, forcing the Turkish authorities into a desperate fight to halt the massive outflow by squeezing liquidity.
Overnight interest rates shot up to more than 4,000 percent before the government caved in. "This was self-inflicted, a political row threatened the integrity of the peg," said Juliet Sampson, emerging markets analyst at Bank of America in London. "In the end they decided relatively early to cut their losses," Sampson added. "It is a good thing that they did not allow the peg to blow on its own, but dismantled it before draining every last drop from their reserves and their credibility."
Experts said Turkey had failed to do enough after initiating procedures for the sale of 10 of the 11 bailed out banks and the privatization of Turkish Airlines and Turkish Telecom stakes.
Koromzay of the OECD said markets lost confidence in the government's commitment to privatization, which would have provided the foreign exchange required to pay for reforms. In the list of causes for the crisis, "I would put that number one," he said.
Other experts agreed. "The political crisis triggered the turmoil, but the gun was already full," economist Ege Cansen, referring to the government's failure to address in earnest the economic troubles after the November crisis.
Bank of America's Sampson said there could be some repercussions in Germany and Argentina. "A few German banks may be hurting but we are not going to see them going under," she said.
"Argentina is the big question because it also has a peg and whenever one goes everyone looks to others. Hong Kong is doing fine. Argentina was already on the ropes so this makes the situation much worse," she said. — (AFP, Paris)
by Geraldine Amiel
© Agence France Presse 2001
© 2001 Mena Report (www.menareport.com)
