Ukraine war casts shadow on the economy

MDN İstanbul

Russia’s incursion into Ukraine and the ensuing war has been the major event of the month of March. The first quarter of 2022 which cast a shadow over the economy has ended with the adoption of sanctions against Russia, having implications on Turkish and global financial markets

In another development, on 16 March the US Federal Reserve approved the first interest rate hike in more than three years, increasing the rate by 0.25 percentage points. While the Turkish Central Bank left the interest rate with no changes, central banks of Brazil and the UK also chose to hike the rate. In all of these cases, the rationale for increasing the rate was named as the inflationary pressure caused by the war in Ukraine. The war has sent energy and commodity prices soaring, adding to the high inflation trend – a major problem in 2022.

FED expected to implement tighter monetary policy
The US Federal Reserve (FED) in its post-meeting statement after the rate hike highlighted the potential implications of the Ukraine war. “We are attentive to the risks of further upward pressure on inflation and inflation expectations,” Fed Chairman Jerome Powell said at the post-meeting news conference. “The committee is determined to take the measures necessary to restore price stability. The US economy is very strong and well-positioned to handle tighter monetary policy.” Officials also adjusted their economic outlook on multiple fronts, seeing much higher inflation than they expected in December and considerably slower GDP growth. Another statement made by the chairman hinted that the Federal Reserve will likely become more aggressive and raise interest rates by 50 basis points at each of its next two meetings.  Powell, speaking at the National Association for Business Economics, said that “inflation is much too high,” adding that the central bank “will take the necessary steps to ensure a return to price stability.” Fed funds futures for May and June have moved higher, as they did across the rest of the year and into 2022.

Turkey’s finance minister expecting better days
Turkey with its 11% percent GDP increase in 2021 became the fastest growing economy among G-20 and OECD nations. However, analysts say that aiming at a similar growth level in 2022 is not realistic, mainly owing to the Ukraine war. For Turkey, inflation remains the top issue of  this year. Minister of Treasury and Finance  Nureddin Nebati in recent remarks said that the tough times currently faced in the economy will pass, adding that there is “ease after every hardship”, and  reiterating his determination to fight inflation. The Ministry of Treasury Finance meanwhile launched USD 2 billion of 2027 bonds for a yield of %8,625. The Treasury will repay 948.7 million dollars in interest on the loan.

The Ukraine war also implies that the number of visitors and tourists to  Turkey this summer will remain low. The war has upended Turkey’s plans of attracting much-needed foreign currency income to the country during the summer. There are, however, plans to attract tourists from nations other than Ukraine and Russia to reach the desired  visitor numbers.

Turkey also  introduced new amendments in March to its  scheme that protects local currency savings against exchange rate volatility. The changes now allow foreign companies and individuals to open Turkish Lira-denominated time deposit accounts that will be guaranteed by the Turkish Treasury and the Central Bank against forex fluctuations. Central Bank Governor Şahap Kavcıoğlu said the savings of Turkish expats stood at around 200 billion dollars, saying even 10 percent of this amount would be  a significant resource for the economy.

What next in the forex rate?
Following the Central Bank choosing not to increase the interest rate, the pressure on the Turkish lira became more persistent. According to recent data from the state statistical agency TÜİK, the inflation rate is 54 percent. The upward trend in inflation is expected to continue. Although worker and employee wages were increased earlier this year, the raises have disappeared among the rapidly rising product price. The increase in commodity prices, spurred by the war, is triggering an economic crisis. All of this is paving the way for higher costs of living and poverty.

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