by Xinhua Writer Xiong Sihao
ANKARA, May 10 (Xinhua) -- As the U.S. Federal Reserve raised its benchmark interest rate by a half percentage point, an Ankara-based economist warns that the rate-hiking cycle is likely to exacerbate Turkey's financial risks.
The Fed's latest move marks its sharpest rate hike since 2000, as it takes more aggressive steps to rein in the high inflation the United States is facing.
The U.S. rate hiking cycle is bad news for Turkey, which is bound to increase Turkey's debt burden, trigger capital outflows and increase depreciation pressure on the Turkish lira, said Selcuk Colakoglu, founding director of the Turkish Center for Asia-Pacific Studies.
Turkey, as a relatively fragile emerging economy, relies heavily on foreign investment to finance its growth, he said, adding a large amount of foreign investment also means a heavy external debt burden, which has been exacerbated by the lira's depreciation.
The Turkish lira lost 44 percent of its value against the U.S. dollar in 2021 and has been under downward pressure since the beginning of 2022.
On Monday, the lira crossed a key threshold against the greenback amid the soaring inflation rate. At 2:10 p.m. (1110 GMT), 1 dollar was traded at 15.03 liras, breaking through the resistance level of 15.
The analyst also pointed out that the Fed's latest rate hike also poses a serious challenge to Turkey's access to capital markets because it means higher borrowing costs for Turkey, which already suffers from a high current account deficit and insufficient foreign exchange reserves.
According to the April data from the Turkish central bank, Turkey's short-term external debt stock totalled 130.5 billion dollars in February, and its current account registered a deficit of 5.15 billion dollars in the same month.
Turkey's gross foreign exchange reserves dropped to 67.7 billion dollars from a peak of 87.9 billion dollars in November of 2021, the central bank showed.
Since the end of last year, Turkey has been undergoing economic woes unseen in decades. The ongoing Russia-Ukraine conflict is worsening the situation, pushing energy and food prices to new highs.
Turkey's annual inflation jumped to 69.97 percent in April, reaching a two-decade high, according to data released by the Turkish Statistical Institute last week.
The highest annual price surge was in the transportation sector, at 105.86 percent. Food and non-alcoholic beverages increased by 89.1 percent, while furniture and household equipment by 77.64 percent.
Economists predict that Turkey is likely to live with high inflation throughout 2022.
Colakoglu said Turkey has some lingering structural problems in its economy.
Turkey has yet to transfer its industry from a labor-intensive one to a more value-added and high-tech one, said the economist, adding some of the Turkish exports are not competitive enough and depend too much on imported raw materials and parts.
All these pose challenges to Turkey in coping with the impact of the Fed's policy tightening, he said.
The Turkish economist suggested emerging economies prepare for the rate hike cycle because rising U.S. interest rates and the ensuing rise in the value of the dollar could wreak havoc on them.
For countries that have borrowed hefty debts in the last few years, they will now face an increase in the real local-currency value of these debts, according to Colakoglu.
In the long run, he suggested emerging economies tackle their challenges through structural transformation, saying a green and low-carbon economy is crucial for their sustainable development. ■
