Why Argentine orthodoxy has worked no

better than Turkish iconoclasm

Presented by

Shiva P (44 A)
Karthikeyan V (22 A)
Background of Turkey’s and
Argentina’s economic crisis 1 2
 Argentina’s economic crisis explained in four views
Due to investor concerns about the
government’s ability to control
inflation and interest rate hikes by the
U.S. Federal Reserve, which
strengthened the dollar worldwide.
The depreciation made Argentina’s
dollar debts more expensive for the
government.
For years, populist governments
printed money to finance wide budget
deficits, causing consumer prices to
spike. Macri’s government has
reduced that practice, but his hikes to
utility prices as part of an effort to
reduce subsidies and close the fiscal
deficit have kept inflation high
In addition to the financial storm,
Argentina has been hit by some bad
luck beyond Macri’s control. The
worst drought in decades slashed the
harvests of soybeans and corn, the
backbone of Argentina’s economy.
The economy has now contracted for
three straight months
The central bank responded to the
rapid depreciation and spike in
inflation by hiking interest rates to 45
percent and selling billions of dollars
in foreign currency reserves to protect
the peso. That resulted in a sharp
decline in reserves, which had grown
gradually since Macri took office in
December 2015.
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 Turkey’s economic crisis explained in three views
Substantial depreciation
of Lira
The last two years have been
fairly bumpy in Turkey:
• An attempted coup in 2016
against state institutions,
including the government and
President that was carried out
by a faction within the Turkish
Armed Forces
• Concerns over President
Recep Tayyip Erdogan’s
resistance to high rates and a
rift with Washington have
rattled investors.
Rising energy prices also
played a part
Rally in energy prices influencing
prices on a large scale:
• Turkey is heavily reliant on
imported oil so a jolt higher in
crude prices, which are priced in
dollars, has dealt a severe blow
both to businesses and
consumers.
• In 2018 alone, the price of Brent
crude, the international oil price
gauge, rose by 28 per cent. But
the cost has doubled for those
paying in liras.
Central bank’s lending rates
Economic attack on Turkey’s Lira
by the view of central banks:
• The central bank’s manoeuvres
have in the past displeased
President Erdogan who has
expressed a preference for lower
interest rates.
• The president, who has appointed
his son-in-law Berat Albayrak as
finance minister said that high
interest rates cause inflation – a
stance at odds with orthodox
economics.
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Actions taken by the affected
countries 2 5
When an emerging market
loses favour with its
creditors, how should its
government respond?

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 What Argentina has done?

Increasing interest rates:

Argentina’s central bank has raised interest rates through the roof by lifting them to 60% on August 30th.

Securing Loans:
Argentina’s government has secured prompt and generous assistance from the IMF, which agreed to a
$50bn loan in June, the largest in its history.

Slashing ministries:
Argentina’s government said it would tighten the ship still further, slashing
the number of ministries from 19 to ten, raising export taxes and cutting
subsidies on transport and utilities.

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 What Turkey has done?

Intimidating and pressurizing the central bank

President Recep Tayyip Erdogan has pressed the central bank not to raise interest rates to support the
lira. But if Turkey is to arrest an inflationary spiral, the president will need to step aside and let the central
bank get on with its job.
Political and ally pressure
The President’s row with Donald Trump has caused a rise in diplomatic disputes wreaking havoc on the
Turkish lira by not ceding to the demand of releasing a jailed American pastor. This has deferred foreign
investors in investing in Turkey decreasing their foreign reserves

Rejecting IMF loan assistance:

Turkey’s President announcing that economic indicators are at a
very good level compared to other countries and adding that
Turkey will no longer borrow loans from IMF and has closed the
chapter for good

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Explaining the Paradox with
Macroeconomic indicators 3 9
 Argentine orthodoxy yielded such poor results?
Structural differences :

Turkey’s. International
Argentina’s International trade is equivalent to
trade equivalent is 25% 54% of the country’s
of the country’s GDP GDP.
Loans to the private sector Loans to the private
amounted to 22% of GDP sector amounted to
85% of GDP

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 Effects of currency devaluation

Currency depreciates

Country’s goods and services become more competitive in foreign

markets

Exports increase

Current Account Deficit improves

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Effects of currency devaluation on current account
deficit
 The greater fall in Argentina’s currency has merely
narrowed its underlying current-account deficit, from about
5% of GDP to 3%.

 Since turkey belongs to a custom union with the European

Union it does not therefore need as big a devaluation for
the same improvement in its trade balance.

 The combination of the economic slowdown and the lira’s

fall is already enough to turn its current-account deficit of
6% of GDP into a surplus in due course

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 Financial Depth of the Economies

◉ Turkey’s economy also boasts greater financial depth than

Argentina’s.
◉ Turkey’s Loans to the private sector amounted to 85% of
GDP compared to 22% in Argentina
◉ Turkey’s dollar liabilities sit with firms. And though Turkey’s
central bank has been slow to raise the official cost of
borrowing for banks, those commercial lenders have been
quick to raise interest rates for their decreasingly
creditworthy borrowers.
◉ Turkey’s private-sector austerity has been more swift and
savage than Argentina’s public-sector version.

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 Our Views on the Article

◉ It’s unclear if either of the approaches will lure back

investors.
◉ Safer US assets are becoming more attractive. The dollar
has been strengthening on the back of the Federal
Reserve’s interest rate hikes and the US’s strong
economy.
◉ It’s possible that emerging markets have just fallen out of
favor.
◉ Turkey and Argentina will need to take action to tackle
their stock of foreign debt and budget deficits as their
currencies plummet.

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THANKS!
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