ANKARA — The U.S. Federal Reserve’s aggressive rate hikes are having a drastic effect on emerging markets, especially import-dependent Trkiye, floundering with a weak currency and runaway inflation, experts said.
On September 22, the Fed decided on a third consecutive three-quarter point rate hike as it continues to step up its fight against soaring inflation in the country.
Following the decision, the Turkish lira weakened to a record high of 18.42 per US dollar. On Tuesday morning, the lira traded at a new all-time low of 18.49 against the dollar as many economists predict a further decline in the Turkish currency.
Emerging markets are suffering from rising US rates, bond yields and a stronger dollar. In June, the Fed raised its key rate by 75 basis points for the first time in 28 years despite the risk of a global recession.
Trkiye, which imports nearly all energy supplies in dollars and has significant dollar-denominated debt, is even more reeling from the Fed’s rate hikes as it will have to pay more to refinance its debt, experts say.
The Fed’s repeated rate hikes will have a negative impact on Turkey’s economy “because Trkiye has a huge foreign debt of about $450 billion, of which $182 billion will be rolled over in a year,” Yalcin Karatepe said, professor of economics and finance at Ankara University, told Xinhua in an interview.
Nurullah Gur, a Turkish economic commentator, echoed Karatepe’s remarks in Daily Sabah.
“As the Fed raises interest rates, the dollar strengthens around the world. This process calls into question the macroeconomic balances of developing countries,” he said.
Analysts are also predicting further flight from emerging market assets with the Fed’s monetary tightening policy.
“Capital outflows may continue to developing countries,” said Seda Yalcinkaya Ozer of Istanbul-based Integral Investment.
Since the end of 2021, Trkiye has been experiencing economic difficulties not seen in decades, as households have seen their purchasing power drop sharply despite government measures and wage increases.
Most countries raised interest rates to combat the economic impact of Fed rate hikes to protect their currencies and prevent the outflow of foreign funds.
But Trkiye did the exact opposite. It has lowered its key rate by 700 basis points since September 2021 despite inflation above 80%.
The pound has lost around 55% against the dollar since the Turkish central bank began its easing cycle, making it one of the worst performing currencies over the period.
Turkish President Recep Tayyip Erdogan, however, backs the policy in hopes of boosting growth and jobs with the aim of creating a current account surplus rather than tackling 24-year high inflation.
Many economists have warned that Trkiye may no longer bear rising levels of risk premiums that raise the specter of a debt repayment crisis.
“Trikiye’s inflation is currently over 80%, compared to just 19.25% at this time last year. The main change is in the benchmark rate,” Karatepe said.
Nevertheless, Erdogan remained unfazed by the criticism and predicted that inflation “will fall back to reasonable levels in February”.
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