Friday, 23 August, 2019

Why Trump's Turkey Tariffs Are Worrying Investors

Greek lieutenant Aggelos Mitretodis and noncommissioned officer Dimitros Kouklatzis were arrested in Turkey Greek lieutenant Aggelos Mitretodis and noncommissioned officer Dimitros Kouklatzis were arrested in Turkey
Russell Knight | 11 August, 2018, 16:09

Economist Chad Bown, who specialises in trade issues, said Turkey accounted for just over four percent of United States steel imports in 2017, but a very small fraction of the aluminum brought into the country.

"If there is anyone who has dollars or gold under their pillows, they should go exchange it for liras at our banks", he said during an address to supporters. That caused a further drop in the lira.

What Are the Government's Options?

Turkey's ever combative President Recep Tayyip Erdogan vowed to not bow to economic pressure.

The government has political and economic options at its disposal to try to calm the currency's volatility, to keep inflation - now about 15 percent but climbing - under control and to reassure investors.

The new set of economic steps are aimed at securing an economic growth of 3-4 percent in 2019, and decreasing the inflation rate to single digits, the ministry said in a press release on August 9.

Turkey's financial crisis and further US pressure spurred more concern among investors as fears appeared to spread to American markets.

Far worse than that, though, is this has also sent Turkey's currency on a downward spiral that threatens to destroy its entire economy. But Erdogan has consistently sandwiched every moderate statement by his son-in-law with nationalist and populist rhetoric that only undermines investor confidence.

Will Diplomatic Tensions Heighten the Currency Challenge?

Erdogan said the two countries have been strategic partners and North Atlantic Treaty Organisation allies for six decades and reminded Washington that Turkey and the USA "stood shoulder to shoulder against common challenges during the Cold War and its aftermath".

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President Donald Trump said on Friday he had authorized higher tariffs on imports from Turkey, imposing a 20 percent duty on aluminum and 50 percent one on steel, as tensions mount between the two North Atlantic Treaty Organisation allies over Ankara's detention of an evangelical pastor and other diplomatic issues. The U.S. responded by filing a complaint against the country with the World Trade Organization.

First, US authorities are looking into impropriety at Turkish Bank Halkbank who are accused of breaking the US financial embargo on Iran.

Erdogan had raised eyebrows Thursday when he appeared to invoke divine intervention, saying: "If they have dollars, we have our people, we have our right and we have Allah!"

This suggests he is sticking to his nationalist message, for now at least, and may still resist delivering the hard measures Turkey desperately needs. An IMF offer will come with strings attached - strings that Erdogan may find a violation of sovereignty - including demands to rein in the country's runaway inflation with higher interest rates.

The lira has lost around 20% of its value in the last 24 hours.

Is There a Contagion in the Air?

.

The Turkish lira hit an all-time low against the dollar on Friday, and there are growing concerns that the country's economic troubles could spread to the eurozone. It has fallen more than 46% in the past year.

Turkey's sovereign dollar-denominated bonds tumbled, with many issues trading at record lows.

In the past, the Turkish authorities have always managed to contain problems by being willing to take aggressive action such as in January 2014, when the central bank hiked its overnight lending rate by 4pc at a midnight meeting.

In the City, fund managers and investment commentators warned of the risk of capital flight from the country and flagged up the risk to European banking stocks - such as Spanish lender BBVA and Italian group UniCredit - from their exposures to Turkish lending.

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