At the end of a volatile week for the embattled Turkish lira, President Recep Tayyip Erdogan has called on Turks to convert foreign currency savings into the country's currency.
The lira, which has fallen about 15 percent this year, hit a low of 4.93 against the US dollar on Wednesday, before Turkey's central bank raised its top interest rate by three percentage points to 16.5 percent in an attempt to help stabilise the currency.
Erdogan has been struggling to stop the currency crisis ahead of the snap presidential and parliamentary elections on June 24.
On Wednesday, credit ratings agency Moody's cut Turkey's economic growth forecasts.
Offering his take on Turkey's economy, Charles Robertson, chief global economist at Renaissance Capital, explains that the big swings in the currency are due to "a massive build-up of private sector debt in Turkey over the last 10-15 years."
He says that in recent years there's been growing concern that "at some point in the medium term, like now, you're going to see a lending stop, growth stop, and then people flee Turkish assets because people have been buying into Turkey under the assumption it would grow five percent forever and the risk is it's going to slump into recession."
While Turkey's private sector debt is around 70 percent of GDP (gross domestic product), the "particular size of the borrowing is not the issue ... China is double that," he says. "It's the scale of the increase over 10 years, which usually coincides with excess borrowing, bad borrowing decisions - perhaps into real estate or something similar - and that tips over. We saw that a lot in the global financial crisis across Eastern Europe countries and to some extent the US had that problem in the global financial crisis."
Asked about Erdogan's recent comments describing high-interest rates as the "mother of all evil", Robertson says, "Erdogan was the market's darling for a decade or so. And there was always local concern that he was encroaching his powers getting too great. He's now been empowered for so long that there is very little constraint upon him ... But it's the central bank which has people concerned the most because Turkey relies on foreign capital to fund its current account deficit ... It needs foreign capital. So to say 'we don't want to pay the interest rates required to attract that capital has frightened the markets."
This week, the central bank finally announced a streamlining of interest rate tools to focus on having one single main rate to reassure investors.
"The 300 bases point rate hike has helped, having interest rates up at around 16 percent has helped, but also for a number of years the central bank has been trying to raise rates but not tell the electorate in Turkey that they're raising rates to try and keep the President [Erdogan] happy," says Robertson.
"This repo rate, which was sitting at around at eight percent, and has now been raised to 16.5 percent or so. That is a sign that finally orthodoxy seems to have won. And in the longer run that will work, like it worked for Russia."
"Orthodoxy does win in the end and it looks like Erdogan has given up ... The central bank is being allowed to do what orthodox people would suggest and what the market wanted to see."
But in the short term, Robertson believes that we will "see inflation rise and that's going to hurt poor people. It usually hurts the poorest."
He predicts that growth will be slow, "at best two to three percent this year. And the population is growing [at the rate of] one to two [percent], so per capita, that's really not much of a gain. These are tough times for Turks now."
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