6 to 12 August: The POTUS fried Turkey: trying times for illiberal countries

Turkey is experiencing a fully blown currency crisis and financial meltdown. The Turkish economy has been running a substantial twin deficit, faces accelerating inflation and has amassed a significant amount of foreign currency-denominated debt both in the public and private sectors. Structural deficiencies have not been addressed by policymakers and, indeed, were exacerbated by the President forbidding the central bank to respond appropriately by aggressively raising interest rates. Consequently, financial market players have now “thrown in the towel” on Turkish assets, which have already been struggling for a long time.

The final straw for financial markets was when US President Trump announced the imposition of higher tariffs on steel and aluminium imports from Turkey in response to a political issue between the two countries (a US pastor was imprisoned in Turkey, as President Erdogan believed the pastor was connected to the outlawed Kurdistan Workers Party).  Existing structural deficiencies were amplified by the POTUS’ step, and the Turkish lira depreciated substantially hitting new historical lows. At the end of the week, the POTUS raised tariffs even further claiming that the Turkish lira was weak against the strong US dollar and adding that “US relations with Turkey are not good at this time.”

Even though the situation would usually result in substantial tightening on the monetary front, no steps have been taken by the central bank, as it has been captured by President Erdogan, which means that the monetary authority has effectively lost its operational independence and is a casual observer to the collapse of Turkish asset prices. During the week, the Turkish lira plummeted 25.9%, while since the beginning of this year, the currency has lost almost 70% of its value vis-à-vis the US dollar. The 10-year government bond yield exceeded 20.6%. Recent events in Turkey underpin the need for orderly state finances, prudent economic policies and a stable external financing position, especially in emerging economies.

Looking ahead

The US diary for this week contains little of major market significance, as monthly retail sales and industrial production data are unlikely to greatly impact global market sentiment. GDP and inflation data in the Eurozone will provide guidance as to whether the European Central Bank’s plan to terminate the asset purchases this December is appropriate. Meanwhile in the UK, CPI and earnings figures will be in the focus.

Asian markets will mostly pay attention to macroeconomic data this week, as China publishes retail sales and industrial production figures. Furthermore, Indian CPI, Malaysian GDP and Taiwanese GDP statistics will also be released. The Indonesia central bank’s rate setting meeting will be the only scheduled policy event this week. However, it is likely to be a “non-event”, as the policy rate is expected to be stable at 5.25%.

The diary in Latin America is relatively empty. Colombia will release GDP figures, while Argentina published July CPI inflation numbers.

In Africa, Kenya publishes PPI inflation from the second quarter, Nigeria releases July CPI inflation, while South Africa announces mining production performance in June. In the second half of this week, the Egyptian central bank holds a monetary policy meeting.

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