The MSCI country index for Turkey (TUR) has lost 8% of its value since the beginning of this year. The index began its slide in May 2013 and has lost 41% of its value since May 22, 2013. However, unlike China, the country has a high current account deficit (estimated by the government at 7.1% of GDP in 2013—up from 6.1% in 2012), largely financed through foreign short-term flows. With the monetary tightening expected after the onset of the U.S. Fed’s tapering program commenced in December, 2013, these funds began exiting, seeking safe-havens in high-quality U.S. debt. This led to price increases in U.S. debt securities despite the Fed’s tightening.
Due to a shortage in foreign exchange reserves, the Turkish government was unable to defend its currency against the U.S. dollar outflows, and the Turkish lira depreciated over 11% versus the U.S. dollar from December 17, 2013, to January 28, 2014. Part of this fall can be attributed to an ongoing high-level corruption investigation in the government.
To prevent the flow of money en masse, on January 28, the Turkish central bank hiked the interest rate on overnight loans from 7.75% to 12.0% and the rate on its overnight borrowings from 3.5% to 8.0%. The move appears to have worked, as the currency has gained 2% versus the U.S. dollar since its rate hike.
To read about more countries that faced Turkey’s twin troubles of high fiscal and current account deficits, read Part 4 of this series.