As the Fed’s rate hike comes closer…

The long-waited rate hike decision by the United States Federal Reserve (Fed) will most probably be made by the next month. The global markets have definitely prepared themselves adequately for the hike. They have prepared so much that many emerging currencies, including the Turkish Lira, has started to gain value against the U.S. dollar over the expectations of a “gradual rise.” The expected rate hike by the Fed had, however, pushed down these currencies until just a short while ago. 

While the dollar has risen significantly against the euro, the European Union (EU) is still talking about improving liquidity. In this vein, the positive mood has been fueled over an expected restrain of the future shortage in global liquidity after the Fed’s decision by the EU, which has already started to pour huge amounts of capital into the markets. This expectation has thwarted any further fluctuation in the dollar. This does not end here. China has also faced problems in raising its production levels in the age of a slowdown in the growth. This has also been pushing down almost all emerging currencies. 

In sum, 2016 will be full of fairly bustling movements in the global markets. Some analysts have even said next year will be a nightmare for the emerging markets after the Fed starts to increase rates and uncertainties in both the Chinese and European markets have spread. The main factor will be in which intervals and to what extent the Fed will hike rates.  

As an emerging market, Turkey will be affected by all these developments. Several analyses have noted that the emerging markets with higher current account deficits, such as Turkey and South Africa, may be affected more negatively than others. Noting that such countries like Turkey need foreign capital to grow, these reports have claimed that they will face a shortage in financial sources. We will all see how big the problem will turn out to be. 

A new growth story…

In addition to these issues, Turkey has some peculiar political and economic problems. In addition, Turkey will be affected worse than other from the Syrian issue and the resulting refugee flow. 

Besides, although the establishment of a single-party government by the Justice and Development Party (AKP) was found positive by the markets, this positive mood has started to fade away as we observe in the latest discussions over the selection of the new cabinet members. Almost everyone agrees that the future economic policies of the AKP will depend on who will be their ministers. 

New economic framework and economic policies will determine whether Turkey will attract further foreign capital and create a “new growth narrative.” 

Furthermore, the new economy administration will also play a big role in defining new monetary policies and how the Central Bank will act. More precisely, if new cabinet members will be effective in maintaining the Central Bank’s stance in resisting President Recep Tayyip Erdoğan’s rate pressures and economic preferences. 

To sum up, there are just days ahead of the Fed’s rate hike. It is obvious the Turkish economy will be affected negatively from this move, but political decisions will determine how bad the situation will be.