El-Erian Says Erdogan Measures May Provide Short-Term Relief, But Carry Major Risks

LOCAL NEWS

• Allianz Chief Economist Mohammed El-Erian says Turkey’s unorthodox attempts to stabilize the lira by linking earnings from deposits to the USD may provide short-term relief, but carry considerable risk.
  • Advantages include avoiding the impact of a partial and implicit rate hike on the rest of the economy and encouraging the lengthening of average duration of deposits
  • Risks include: exposing the fiscal accounts/CBRT to a large financial burden unless other measures are taken to control inflation and limit renewed pressure on the currency away from dollarization.
  • “If the mechanism fails, it will further undermine the credibility of policymakers, making it harder for the next set of measures to take hold quickly even if they are comprehensive and appropriate”
• Treasury Minister says they will not allow loans to be used in FX purchases: “We identified those who took out loans from the Credit Guarantee Fund and deposited them in dollars. We will no longer allow this,”
• According to the CHP report, $5.5b melted from central bank’s gross reserves in the last three weeks. According to the report, the Central Bank sold $6.1 billion directly in five separate interventions in exchange rates between 1-17 December, and $392 million in forward transactions
• Consumers demand prices to be cut with the decrease in the foreign exchange rates. While calls are being made to withdraw the price hikes, it is predicted that prices may decrease only gradually.
  • “When the exchange rate increases, the hikes are speedy, but they go down crawling when the foreign currency falls,” consumer associations say