8/9/2018 Turkey’s Problems Run Beyond the Central Bank - WSJ

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Turkey’s Problems Run Beyond the Central

Bank
A big Turkish rate increase won’t solve investors’ loss of con idence

By Richard Barley
Aug. 8, 2018 10 42 a.m. ET

What can stop the Turkish market tailspin? One recurring suggestion is the Turkish central
bank should deliver a knockout rate increase, having failed to do enough so far. But Turkey’s
problems run deeper.

The steepness of the lira’s decline is startling. It has fallen 7% against the dollar so far in
August, 28% so far this year and a whopping 64% over five years. Most notably in recent weeks
it has failed to rally even as the dollar’s broader rise has paused, signaling that the problems are
rooted in Turkey, not in a broader inhospitable environment for emerging markets. Bond yields
have shot higher and Turkish stocks have taken a drubbing, down 16.5% this year.

The central bank bears its share of responsibility for this: It shocked the market in July by
leaving rates unchanged when analysts were expecting an increase in response to surging
inflation, which has reached almost 16%. The central bank has responded in the past with
emergency rate increases, which explains why the market and analysts are focused on this
possibility.

The further decline in the currency will fuel higher prices still. That will increase the size
of the response necessary for markets to believe the central bank is serious.

However, the latest lurch lower in the lira has coincided with increased geopolitical tensions:
The U.S. has imposed sanctions due to Turkey’s detention of an American pastor, Andrew
Brunson. The economic impact is limited, but the situation could escalate and monetary policy
isn’t a cure-all.

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A currency exchange of ice in Istanbul, Turkey. PHOTO: ERDEM SAHIN EPA EFE REX SHUTTERS EPA SHUTTERSTOCK del

un
der President Recep Tayyip Erdogan is increasingly under question, relying as it does on credit
flows to support growth. External debt has risen to 53% of gross domestic product, with close to
70% of it in the private sector. Trouble for Turkey’s banks and companies poses a contingent
risk to one of the few strong points Turkey has left: a relatively low government debt burden.

The clamor for action from the Turkish central bank will only get louder, largely because it
would be the most immediate and decisive step to stem the lira’s fall. But that would only be the

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8/9/2018 Turkey’s Problems Run Beyond the Central Bank - WSJ
first step for Turkey on the road to regaining confidence. Reducing Turkey’s reliance on flows of
hot money from abroad, making it less vulnerable to turns in sentiment, and encouraging long-
term investment will take a lot more work—and time.

Write to Richard Barley at richard.barley@wsj.com

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