Turkish Crisis: Lira Collapsed and Tariffs Ensued

The recent situation in Turkey’s financial markets have certainly been tense. Turkish currency, lira, has lost about 30% of its value against US dollar since New Year. Lira fell as low as 6.89 per US dollar on Monday (13/8), down about 7% on the day and 45% since the start of the year. Turkey's stock index fell 3.5%. The stock market has fallen 17%, or if you measure it in US dollars, 40%. Borrowing for 10 years in lira now costs 18% a year. Even borrowing in US dollars is expensive for Turkey at a cost of around 7%.

The other reason is that cheap borrowing rates in major economies like the US are rising, drawing investors’ money away from emerging economies like Turkey. Ultra-low interest rates in the US and Europe has been for years encouraged companies in Turkey to borrow in foreign currencies. That helped the economy, which boosted 7% growth last year. But now the US Federal Reserve is raising rates.

Politics plays a role as well. The lira’s fall has been made worse by President Recep Tayyip Erdogan’s statements on economic policy. He has urged the central bank to not raise the interest rates. Turkey’s decision to jail a Protestant pastor from the US has led to the US imposing sanctions on two Turkish government ministers because conservative evangelical Protestants are a key constituency for US President Donald Trump.

President Trump said on Friday (10/8) that he would double the rate of tariffs on steel and aluminium imports from Turkey, causing additional pain on President Erdogan, whose country is in the midst of an economic crisis. In a Twitter post on Friday morning, Mr. Trump said that the United States would impact Turkey’s aluminium tariffs to 20% and steel tariffs to 50% and cited the country’s deteriorating currency. Turkey ships little aluminium to the United States, but it is the US' sixth largest foreign supplier of steel. American companies that source metals from Turkey are bracing for a further impact, after already seeing their prices rise this year as a result of the existing tariffs.

The increasing tariffs on Turkey’s aluminum and steel that was authorized by the US not only affects Turkey itself, but also few others developing countries, including Indonesia. On Monday (13/8), the Jakarta Composite Index was already weakening at 0,78%. At the end of the day, the trade was closed and the number dropped further from 0,78% to 3.55%, then again, Jakarta Interbank Spot Dollar Rate or commonly known as Jisdor announced that rupiah has weakened against US dollars. The number dropped down 1,01%, from Rp14.437 to Rp14.583 per US dollars.

The economic crisis on Turkey causes Erdogan, the Turkish President, to increase tariffs on US imports on Wednesday (15/08). Turkey raised the tariffs on cars (120%), alcoholic beverages (140%), and on leaf tobacco (60%). Those goods are not the only targets, as President Erdogan said that Turkey 'will boycott the electronics products of the US'.

This economic crisis led to the increase of Indonesia’s 7-Day Reverse Repo Rate of 25 basis points to 5,50%. The increase was effective starting from August 15th 2018. The governor of Bank Indonesia, Perry Warjiyo, said that the decision was consistent with the efforts to maintain the attractiveness of the domestic financial market and to control the current account deficit within safe limit. Yesterday (16/08), the Jakarta Composite Index was closed at 5,783.80, dropping another 1,32%. The Jisdor also dropped down 0.25% from Rp14.583 to Rp14.619 per US dollars.

Sources:

BBC News

The Economic Times

Market Bisnis

Finansial Bisnis

IDX

Bank Indonesia

Washington Post

The New York Times

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