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Turkey’s options to stop the lira’s fall Erdogan can raise interest rates, turn to the IMF, impose capital controls or wait it out Analysts think it would be unlikely for President Recep Tayyip Erdogan to bow to market pressure Share on Twitter (opens new window) Share on Facebook (opens new window) Share on LinkedIn (opens new window) Save Save to myFT Jonathan Wheatley in London 3 HOURS AGO Print this page3 The Turkish lira has lost 30 per cent of its dollar value this year as investors express rising alarm at the apparent unwillingness of the government in Ankara to address the problems behind the currency’s fall. What actions could Turkey take? Raise interest rates Most alarming for investors has been the central bank’s refusal to raise rates, even though inflation is running at more than 15 per cent. For years, investors have doubted the independence of the central bank, as President Recep Tayyip Erdogan railed against high interest rates and an ill-defined interest rate lobby. Such fears deepened in May when Mr Erdogan, on a visit to London when he was expected to reassure markets, vowed to take greater control of monetary policy and declared that high interest rates caused inflation rather than cured it. His victory in June’s presidential election enhanced his powers. Last month, the central bank dashed market expectations by keeping rates on hold. William Jackson, emerging markets economist at Capital Economics, said a rate rise may be on the cards but would not be a lasting solution. “The lira’s recent fall has followed the same trajectory that prompted emergency hikes in the past,” he said. “The question is whether Erdogan will allow it.” He also questioned whether such an increase would be effective. “We had one in May and a few months later we are in the same situation,” he noted. Turn to the IMF Some analysts have suggested Turkey should seek support from the IMF, as Argentina did in June. But this would require Turkey to agree to — or, ideally, propose — an economic programme of tight monetary and fiscal policies. There is little sign this will materialise. After his June victory, Mr Erdogan appointed Berat Albayrak, his son-in-law, as the government’s leading official on finance, in place of the widely respected Mehmet Simsek, one of the few voices of orthodoxy in government. Mr Albayrak, who heads an expanded finance ministry, is due to announce a new economic plan on Friday. Analysts fear it will do little to tackle inflation or Turkey’s large current account deficit. “It is not impossible that Erdogan will bow to market pressure and announce market-friendly measures,” said Jane Foley, a strategist at Rabobank. “But it seems very unlikely that he would concede much fiscal control to the IMF. I don’t think he’s anywhere near that frame of mind.” Mr Erdogan has long taken pride in the fact that Turkey is no longer under an IMF programme — as it was at the start of his 15 years in office — a development that he sees as regaining the country’s sovereignty. Reach agreement with the US The sense of crisis has been fuelled by rising tension with the US and the threat of additional sanctions to measures Washington imposed on Turkey’s justice and interior ministers last week over the detention of a US pastor two years ago. A Turkish delegation visited Washington this week in what was seen as a bid to find a face-saving solution. But the mission delivered no immediate breakthrough. Ms Foley said the possibility of sanctions was reflected on foreign exchange markets. “We have an authoritarian leader in a country that does not want to see its policies dictated by the US,” she said. “There has been no compromise and people will go on selling the lira.” Capital controls Ankara could try to halt the lira’s slide by preventing capital outflows from the country. But this is unlikely to be a viable option. Mr Jackson at Capital Economics noted that capital controls work best when the state has tight control of the financial sector and the objective is to stop residents sending money overseas, such as in China. “Most of Turkey’s flows are by foreigners lending or investing in the country,” he said. “Capital controls would only prevent any new lending.” Wait it out Analysts say that, for now, this is the most likely option. Despite high inflation and its persistent current account deficit, Turkey’s budget deficit, at the equivalent of about 2 per cent of gross domestic product, is still manageable, said Mr Jackson. “Even if fiscal policy stays loose, it won’t raise worries about Turkey’s ability to pay its debts,” he said. “The problem is that loose policy will increase demand and cause more inflation ahead.” He said that, for now, Turkey was likely to hope slower growth would ease the pressure on public finances. Indeed, the finance ministry expects GDP growth next year of between 3 and 4 per cent, after a recent average of 7 per cent. Other analysts highlight Turkish companies’ burden of foreign currency denominated debt, which becomes progressively harder to service as the lira slides. The Turkish central bank said in its most recent regular report that Turkish non-financial companies’ foreign exchange liabilities totalled $337bn in May. Ms Foley warned that inaction would only result in more selling of the lira and other Turkish assets. “You could argue that assets are already looking cheap,” she said. “But you cannot be sure they will not get cheaper. We have seen time and again with authoritarian leaders that things have to get a lot worse before they get better.”