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Turkey increases its risk of inflation and over-indebtedness due to the lack of an adapted monetary policy in the face of the Covid-19




Turkey weakened by its monetary policy (photo: F.Dubessy)
Turkey weakened by its monetary policy (photo: F.Dubessy)
TURKEY. According to a Euler Hermes study, emerging markets (excluding China) have suffered an unprecedented capital flight of around $84bn (€71bn) due to Covid-19. Faced with this situation, in March 2020, their central banks implemented monetary policies, known as unconventional, unprecedented and not always appropriate.

Published on Thursday 10 September 2020, the survey raises the question of inflation and debt sustainability. "Notwithstanding the short-term benefits, if these QE programmes (Editor's note: quantitative easing policy - monetary policy of quantitative easing to generate fresh money to stimulate the economy) in emerging markets are pursued intensely, they could cause serious problems in the medium to long term such as inflation and debt overhang," it says. Of the 16 countries concerned, Brazil, India and Turkey are the main targets.

Turkey thus increases its inflation risk score to 2.21, placing it in first place among emerging countries, well ahead of the second, Hungary, with its 1.20. In August 2020, Turkey suffered an inflation rate of 11.8%, ranking first (second only to India at 6.9%) among the emerging countries. Ankara also faces a high risk of debt sustainability.

Counter-productive monetary policies

"Without a strong fiscal commitment, short-term relief from QE6-type policies on local currency debt markets can become counterproductive by discouraging international investors in the medium term", underlines the Euler Hermes study. If quantitative easing is carried out without a defined framework and of sufficient size, it is likely to increase the government's cost of borrowing in the medium term. In fact, in a context of rising inflation and concerns about debt sustainability, investors may demand higher risk premiums for new local currency debt issuance in emerging countries".

Turkey, Brazil, Thailand, India, Indonesia and Malaysia are expected to refinance more than $50bn (€42.3m) of public debt by the end of 2022.


Read Euler Hermes' study: "QE in emerging markets: playing with fire?".

Frédéric Dubessy


Thursday, September 10th 2020



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