Phillip Inman, from the Observer, comments:
Turkey‘s finance minister, Mehmet Simsek, understands the two-faced nature of western capitalism. A former banker with Merrill Lynch, based in London, he has seen the way investment banks work. One minute you are feted and showered with bonuses; the next you are being shown the exit.
It can be the same for a developing country. At one moment it’s the darling of international investors; the next it finds itself standing over a trapdoor to the lower economic regions.
Only a few years ago Turkey’s economy was growing at 10% a year and predicted to become a Middle East powerhouse. While Syria and the rest of the region struggled with internal strife, it was Turkey, with its educated young population, that would accelerate into the first rank of countries.
Even after the financial crash, money poured into Istanbul, and into the many enterprise zones set up by Simsek and his predecessors to lure US and European manufacturers. Then the tide turned.
Since 2011 the country has been struggling. The currency lost 25% of its value as the prospect of higher interest rates in the US triggered a flight of capital back to New York. A corruption scandal that has reached as far as the prime minister’s office has not helped settle the nerves of investors.
Simsek, a dapper Europhile with a calm public manner, has gambled that raising Turkey’s base rate to 10% will avoid a further exodus of funds. He has ruled out anything more draconian, for fear of spooking the markets.
Last week he denied any plans to introduce capital controls, adding that Turkey would in effect bend over backwards to please western investors by further liberalising its financial sector.
Turkey would leave its floating exchange rate system in place, he said, though prime minister Recep Tayyip Erdogan, a more volatile character, who is facing a general election in a few months, heightened anxieties when he referred to a possible “out of the ordinary” economic package.
But plenty of analysts believe that whichever way he turns, Simsek will lose. Stephen Jen of currency hedge fund SLJ Macro Partners said: “Many of these emerging-market economies [including Turkey] are cornered: they have to choose between defending the exchange rate, fighting inflation and supporting growth. Sudden stops in capital inflows tend to force countries to face lose-lose situations.”
India, Indonesia, South Africa and Brazil, which were grouped with Turkey recently as “the Fragile Five” by Morgan Stanley, are in the same boat, as are Argentina and Russia. Each has its own special circumstances, but they share problems that have left investors disenchanted.
Raghuram Rajan, head of India’s central bank, is also keen to liberalise financial markets in order to encourage investment. Like Simsek, he has problems stemming the exodus of funds without jacking up interest rates and killing growth. But his stance is more openly aggressive: he accuses the US and Europe of supporting international monetary co-operation only while they were in recession, and of ditching it now their recoveries are under way.
“International monetary co-operation has broken down,” said Rajan, a former chief economist at the International Monetary Fund. “Industrial countries have to play a part in restoring that [co-operation between central banks], and they can’t wash their hands and say, we’ll do what we need to and you do the adjustment.”
His chief bugbear is the prospect of higher US interest rates making the dollar more attractive and pulling more cash out of India. The same goes for the others in the fragile five. Their problem is that investors, like a huge shoal of hungry fish moving from one feeding ground to another, enjoy visiting emerging markets when the returns are high.