Fear of capital outflow growing in Turkey’s economic circles

Fear of capital outflow growing in Turkey’s economic circles

Bad news on the Turkish economy keeps coming, one after the other.

While everything in the global financial system is working against us, the political crisis and the terrorism incidents fuelled by that crisis have tremendously increased economic uncertainty.

Just as we were about to say that we are getting used to it, a new crisis stemming from China came along.
We started the week with the China crisis and its reflection on all developed and developing countries. 

It is not clear how long this wave will last, but the truth that this crisis has unveiled is that the 2008 economic crisis in the global economy is continuing.

In other words, fluctuations will continue for some time until a proper normalization and it will take time to reach a point of balance.

Normalization is certain, but it is still a matter of curiosity how long it will take and exactly how economies will emerge this process. 

In the coming days and months, it is clear that global capital will flow to big states instead of developing countries like Turkey.

At that point, the timing of the U.S. Federal Reserve’s interest rate hike is important for the process to become clearer.

The expectation that the Fed might announce a rate hike in December rather than September - due to the China crisis and the fact that inflation in the United States has not come to the targeted levels - has been gaining ground in recent days. 

But at the same time there is talk that a rate hike could come in small steps. We will see whether this expectation is wishful thinking or whether it will become a reality.

Looking from Turkey’s point of view, our job looks more difficult. Political uncertainty is set to last longer and the fact that the economic administration is endorsing a stance away from taking the necessary measures makes the situation graver.

Warning by rating agencies 

At that point, warnings that capital outflows in the coming period will intensify have started to increase.

It was already expected that capital parked in developing countries would return to safe ports, (i.e. to large and strong economies).

The critical point here will be the differentiation among developing countries. In other words, while the money will retreat to safe ports, where it will retreat from and at what speed is important. The more capital outflow there is, the more national currencies will depreciate.

Just as we are in a period in which the Turkish Lira is fast losing value, the increase in the outflow could further push the increase in the foreign exchange rate, which might have dire consequences.

Standard and Poor’s issued an important warning last week that did not attract much attention. “This uncertain tableau could weaken the country’s political reaction to both internal and external events, including potential capital outflows,” it said.

The reason for this was cited as the upcoming re-election. Can you see how the damage inflicted on Turkey’s economy by a fresh election, forced on us by politicians’ personal ambitions, is taking place in front of our eyes?