Reserves 5 months import= $ 139 Billion. Indonesia= $126 B
Turkey has in recent years been one of the fastest-growing economies in the world, even outperforming economic giants China and India last year. In the second quarter of 2018, the country reported 7.22 percent growth in its gross domestic product.
Reserves and upcoming debt payment. Its impressive growth numbers were fueled by foreign-currency debt.
Reserves 5 months import but could drop if Lira doesn't stabilize
Raise interest rate: Without raising interest rates, Turkey has few other options to get out of its economic problems, said Eric Robertsen, global head for foreign exchange, rates and credit research at Standard Chartered Bank.
Turkey earlier said it was limiting banks' foreign exchange swap transactions but it wasn't implementing capital controls. Those measures are merely "baby steps" and won't do much unless interest rates are raised, Robertsen told CNBC's "Squawk Box."
"The interest rates policy is kind of the critical line of defense," he said. "What they have to do is make sure that currency doesn't leave the country in a full-fledged capital flight ... it has to be a combination of currency measures and interest rates, there's no way around that."
worsening financial conditions, shaky investor sentiment, inadequate management of the economy and tariff threats from the U.S.
That expansion, however, was fueled by foreign-currency debt, analysts said. At a time when central banks around the world were pumping money to stimulate their economies after the global financial crisis, Turkish banks and companies were racking up debt denominated in U.S. dollars, they said.That borrowing, which fueled consumption and spending, resulted in Turkey running deficits in both its fiscal and current accounts. The former happens when government spending exceeds revenue, while the latter essentially means a country buys more goods and services than it sells.
The country's foreign currency debt now stands at more than 50 percent of its GDP, according to estimates by the International Monetary Fund.
Making the situation worse for Turkey is President Recep Tayyip Erdogan's preference to keep interest rates low even though inflation is more than three times the central bank's target.
To many analysts, Turkey wouldn't have gotten into the current predicament if its central bank had been left to do its job.
The Turkish economy has been "overheating" with inflation — at 16 percent in July — way exceeding the central bank's target of 5 percent. Raising interest rates could have helped to stem such a massive increase in consumer prices: Higher rates tend to attract foreign investors, who would need the lira to buy Turkish assets. That could in turn support the currency, which makes imports cheaper and lessens the burden of paying back foreign debt.
But Erdogan has said he's in favor of lower interest rates to continue driving growth. His influence over the country's central bank has undermined investor confidence, experts have said.
"President Erdogan continues to prioritize growth and lower rates which will extend the current crisis, rather than allowing the economy to rebalance. He is here to stay, and markets don't have confidence in him. That's a dangerous mix," Briggs wrote.
Surplus in Current Account is offset by deficit in Capital Account. If we export goods then we import financial assets of the foreigners who purchased those goods.
The country's borrowing resulted in deficits in both its fiscal and current accounts, and Turkey doesn't have large enough reserves to rescue the economy when things go wrong, experts say.
Reserve Turkey $140 B isn't enough to cover the CAD $32 B, unlike Indonesia's reserve $126 B with CAD $ 8 B. Turkey's CAD 5% GDP, Indonesia is 3%.
Turkey is not the only economy with "twin" deficits and high amounts of foreign currency debt. Indonesia, for example, also runs fiscal and current account deficits and its foreign currency borrowing is roughly 30 percent of GDP.
But unlike Indonesia, Turkey doesn't have large enough reserves to rescue the economy when things go wrong, said Richard Briggs, an analyst from research firm CreditSights.
According to Briggs, Turkey's reserves are notably low compared to its $181 billion in short-term debt denominated in currencies other than the lira. On top of that, much of the foreign currency in Turkey is held by banks, and those funds could be withdrawn by customers, he added.
That means when the lira falls, Turkey may not be able to buy up its currency to prevent it from spiraling further. If that situation worsens, the country would have to find other ways to finance its debt, including possibly getting bailed
Turkey vs Indonesia Document
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