Several cryptocurrency exchanges are plagued by poor market surveillance, pervasive conflicts of interest and lack sufficient customer protections, the New York Attorney General’s office said in a report published on Tuesday.
The study found that online platforms where virtual currencies such as bitcoin can be bought and sold by individuals operate with lower safeguards than traditional financial markets, are vulnerable to market manipulation and put customer funds at risk.
“As our report details, many virtual currency platforms lack the necessary policies and procedures to ensure the fairness, integrity, and security of their exchanges,” Attorney General Barbara Underwood said in a statement.
As a result of the findings, the attorney general asked New York’s Department of Financial Services (NYDFS) to review whether three exchanges might be operating unlawfully in the state.
The attorney general’s office launched its Virtual Markets Integrity Initiative in April 2018, asking 13 platforms to voluntarily share information about their practices.
Four platforms did not participate, claiming they did not allow trades from within New York State. The Attorney General’s office investigated whether the platforms did operate in the state, and has referred three – Binance, Kraken and Gate.io – to NYDFS. The three platforms could not immediately be reached for comment.
U.S. and international regulators have begun clamping down on malpractices in the cryptocurrency market over the past year as trading in the nascent asset class boomed.
Two Wall Street regulators last week announced a series of actions, including levying fines, against companies involved with cryptocurrencies, while a New York federal judge ruled a case could proceed in which U.S. securities law was being used to prosecute fraud cases involving cryptocurrency offerings.
The attorney general’s report detailed how some of these platforms conduct overlapping lines of business that present “serious conflicts of interest,” including trading for their own account on their own venues. Some platforms also issue their own virtual currencies or charge companies to list their tokens.
The study also found that “trading platforms lack a consistent and transparent approach to independently auditing the virtual currency purportedly in their possession”, making it “difficult or impossible” to confirm that the exchanges are responsibly holding customer accounts.
Although some platforms police their markets for trading abuses, others do not, the report found.
“Platforms lack robust real-time and historical market surveillance capabilities, like those found in traditional trading venues, to identify and stop suspicious trading patterns,” the report said.
Videos of Venezuelan President Nicolas Maduro feasting on steaks at an upscale restaurant have sparked worldwide outrage on behalf of the poverty-stricken people of his country.
One video show celebrity chef Nusret Gokce, also known as “Salt Bae,” carving meat for the president and his wife, Cilia Flores, at the Nusr-Et restaurant in Istanbul, where each cut of meat can cost hundreds of dollars.
Florida Senator Marco Rubio slammed the chef who was filmed with the “dictator,” who was shown eating “a five-star gourmet meal, smoking fine cigars while the people of Venezuela are literally starving.”
“It’s an outrage, disgusting … this is a man starving human beings and [Salt Bae] is celebrating him as some sort of hero – I got pissed,” Rubio told the Miami Herald on Tuesday.
“I don’t know who this weirdo #Saltbae is, but the guy he is so proud to host is not the President of #Venezuela. He is actually the overweight dictator of a nation where 30% of the people eat only once a day & infants are suffering from malnutrition,” Rubio tweeted Tuesday.
The senator also tweeted the address and phone number of the chef’s restaurant in Miami, which is home to scores of Venzeulan-Americans and Cuban-Americans who despise the socialist leader.
Opposition leader Julio Borges, who lives in exile in Colombia, tweeted: “While Venezuelans suffer and die of hunger, Nicolas Maduro and Cilia Flores have a good time in one of the most expensive restaurants in the world, all with money stolen from the Venezuelan people.”
The once-wealthy oil-producing nation has been in an economic crisis for the past five years. The turmoil has left many Venezuelans struggling to find food and medicine and driven masses to flee to other South American countries.
According to the United Nations, more than 2 million Venezuelans have fled since 2014.
A Meganalisis poll published in the Miami Herald last month found more then 30 percent of Venezuelans say they only ate one meal a day, nearly the same number report eating “nothing or close to nothing” at least one day a week and a staggering 78 percent said they had trouble finding enough food.
Alibaba chairman Jack Ma’s surprise announcement last week that he would step down as head of the world’s biggest e-commerce company, has sparked animated discussions on what would be his next career move and whether the Chinese government was behind the decision.
Some analysts have suggested the government was keen to enhance its influence over global giants from China like Huawei and the so-called BAT club, Baidu, Alibaba and Tencent. Such a move would leave little space for high-profile and largely independent players like Jack Ma.
“The Chinese government seems to be wanting to have a more direct ‘say’ into the BAT, particularly in Alibaba and Tencent,” said Lourdes Casanova, director of Emerging Markets Institute at Cornell. “The government is saying, ‘You have become so powerful because we have protected you against the big world players. It is time to give us back,’” she said trying to analyze the government’s viewpoint.
Ma and the Chinese government have not publicly commented on this speculation about the motivation for his announcement.
Many believe Beijing needs to enhance its economic diplomacy at a time when it faces severe trade challenges from the Trump administration in the United States, and would like to see domestic companies take a policy driven approach instead of merely focusing on profit making.
The government may also be worried about the rising influence of American, European and Japanese investors who have either struck collaboration deals with Chinese companies or bought heavily into their shares.
Internationally established Chinese companies are a key part of Beijing’s economic diplomacy. They cut major deals in different countries timed with the visit of the country’s leaders. Alibaba has been particularly effective because it is buying stakes in a range of foreign companies and assisting in the export of Chinese goods through its online channels.
The latest instance is Chinese President Xi Jinping’s visit to Russia this week, which was marked by a deal signed by Alibaba and the Russian Internet group, Mail.ru.
Analysts believe Ma’s next career move would reveal if his decision was related to a Chinese game plan in the field of economic diplomacy.
Ma’s soft power
A lot of issues ride on his next move. Ma has not just represented China’s soft power to the world, but also played a crucial role as an economic diplomat.
He is formally relinquishing his position a year from now, and has named his successor, David Zhang, for the post. Industry players are asking whether he will continue playing this ambassadorial role for China or simply walk away from the spotlight.
“He is not going to stop being a businessperson. He still owns a large, majority shares. What we are talking really is about stepping away from that role of being a chairman and being an executive chairman,” Jacob Cooke, CEO of consulting firm, Web Presence in China.
Ma’s influence goes far beyond the narrow confines of the company’s business, which include diverse investments in different parts of the world. Alibaba’s online sales platforms opened up new markets, fed new ideas and helped thousands of small and big Chinese companies to innovate and grow over the past three decades.
The government is believed to have laid down rules about celebrity behavior favoring the low-profile approach and is opposed to business leaders developing a huge fan following for themselves.
“While many business leaders in China keep a low profile, Jack Ma shined not only in China but all over the world,” Casanova said.
Ma will continue to play an important role in the business world, experts said.
Some analysts expect him to become an investment banker, which will make him the second big Chinese force after the government-run China Investment Corporation in worldwide investment business.
“He’s going to basically move away from Alibaba into what is going to be a Chinese Warrant Buffet,” Cooke said. “Looking at South China Morning Post, e-commerce, block chain, I mean, portfolio investments.”
Ma met Trump and offered to help him create one million new jobs as soon as the new president was elected. But there are no signs Trump took up the offer.
And yet, he will not gladly accept a government role to deal with the trade and investment challenges from Washington although he has deep connections in the United States, analysts said.
Ma caused a bit of a surprise on Tuesday when he commented on the ongoing trade war between the U.S. and China calling it a “mess” which might go on for the next 20 years. “It’s going to last long, it’s going to be a mess,” he said.
Casanova thinks Ma is taking a genuine break and will make up his mind on the next move after some time. “I think we should not say ‘no’ to the possibility of his going back to Alibaba too much,” she said.
China says it has no choice but to retaliate to U.S. President Donald Trump’s 10 percent tariffs on $200 billion in Chinese goods, risking a further escalation of trade tensions between the world’s two biggest economies.
On Tuesday, China announced a tariff hike on $60 billion of American products.
In a brief statement posted online Tuesday, China’s Commerce Ministry said, “To protect its legitimate rights and interests and order in international free trade, China is left with no choice but to retaliate simultaneously.”
On Monday, the Communist Party backed Global Times newspaper warned that if Trump went ahead with the tariffs, China would not just play defense.
At about the same time the Commerce Ministry statement was released, a research director for North America and the Pacific at the Commerce Ministry also delivered a commentary on China’s state-run CCTV news network.
The official said the latest round of tariffs have brought uncertainty to ongoing efforts for representatives from both countries to meet again and hold trade talks.
“Under the party’s strong central leadership, China has the resolve and confidence to press ahead and use deeper reforms and deeper opening up as well as the development of our domestic market to counter United States unilateralism,” Li Wei said.
Foreign Ministry spokesman Geng Shuang told a daily briefing Tuesday in Beijing that talks are the only correct way to resolve the issue and accused the United States of being insincere. Last week, the United States extended an invitation to China’s top negotiator, Liu He, to resume talks later this month in Washington.
The $200 billion in U.S. tariffs go into effect in less than a week, on September 24, leaving the two sides little time to sit down.
On Monday, President Trump warned, in a statement announcing his move, if China retaliates against U.S. farmers or other industries, Washington “will immediately pursue phase three, which is tariffs on approximately $267 billion in additional imports.”
The additional $267 billion in tariffs is expected to cover all Chinese imports to the United States.
American and European businesses operating in China say that if Washington presses ahead with more and more tariffs, it is likely to only add to the challenges businesses are already facing.
According to surveys conducted by the American Chamber of Commerce in China and the European Chamber of Commerce, trade tensions are already hitting and hurting supply chains of foreign businesses. Some companies have begun to move manufacturing away from China and the United States to avoid the impact of growing trade tensions, the European Chamber said.
European Chamber President Mats Harborn said engagement on the part of Washington and Beijing is the answer.
He said that what the United States is doing now is “economic madness” that risks creating a vicious cycle for business that could have an impact in China and elsewhere. But the root of the trade dispute is that China’s reform is lagging behind its development, creating a “reform deficit.”
“Closing the reform gap will create better private companies in China, foreign companies,” Harborn said. “And reducing the reform deficit should also help reduce tensions in the ongoing trade war.”
In its annual position paper on European business in China, the chamber lists 828 recommendations for Chinese authorities to address that deficit.
One of the key hurdles both private Chinese enterprises and foreign companies face is the dominant position state owned enterprises (SOEs) enjoy. State owned enterprises account for around 30 percent of the economy and yet enjoy nearly 70 percent of all financing, the report said.
Unfair trade practices and the way SOEs contribute to an unbalanced playing field in China are key elements of the investigation the Trump administration carried out prior to launching its first round of tariffs.
But how far China is willing to go to change is uncertain. Later this month, a meeting on SOEs will be held that many are expecting will be an indicator of the future course China’s Communist Party leaders plan to chart.
“We hear that there is a move to make the SOEs stronger, bigger and better,” Harborn said. “Such ambitions are hindering the further opening and development of the vibrant private Chinese sector.”
If reform of SOEs is not on the agenda at the meeting, that would be seen as a clear provocation, given the current climate, he said.
Africa has the globe’s fastest-growing youth population as well as 10 of the poorest countries, a volatile combination that warrants making it “the world’s most important priority for the foreseeable future.”
The Bill & Melinda Gates Foundation lays out that argument in its second annual report on progress toward sustainable development goals set by the United Nations for 2030. This Goalkeepers Data Report, released Tuesday, urges targeting Africa with the same kind of investment intensity that lifted once-poor China and India into the ranks of middle-income nations.
Sixty percent of Africans are younger than 24, numbers that Melinda Gates emphasized in a phone interview earlier this month with VOA’s English to Africa Service.
“If the world makes the right investments in health and nutrition and education,” she said, it could unleash the potential of “an amazing generation that has unbelievable ingenuity.”
The report notes that while the youth population is booming in Africa, it’s shrinking elsewhere in the world. For example, the median age is 19 in Africa – and 35 in North America. Populations are expected to soar by 2050 in the 10 poorest countries: Benin, Burundi, Central African Republic, Democratic Republic of Congo, Madagascar, Malawi, Nigeria, Somalia, South Sudan and Zambia.
Melinda Gates described the foundation as a “catalytic wedge,” whose investments can fuel beneficial projects and programs.
“We start getting things going” with many partners on the ground “working in culturally, contextually sensitive ways,” she said. “We take some risks, but ultimately it’s the governments who scale them up, and that work is done in deep partnership with many people around the globe.”
The Gates Foundation is the biggest of U.S. funders aiding Africa, such as the Ford, Rockefeller, Conrad N. Hilton, Carnegie and Open Society foundations, Inside Philanthropy reported in 2016. Earlier this year, the news website observed that charitable giving by Africans is growing, too.
To date, the Gates Foundation has invested more than $15 billion “in projects relevant to Africa,” the Gatekeepers report says, while promising to spend more. It has targeted three areas for investment: health, education and agriculture.
Health: The foundation subsidizes a range of health programs, from childhood vaccination and good nutrition, but it gives special attention to family planning and HIV interventions.
Among countries that have risen economically, “every one of them allowed voluntary access to contraceptives to women,” Gates told VOA. “We know if men and women can space the births of their children … there are more opportunities then for those children and their families. Girls can stay in school” and, when educated, are better able to provide for their families.
“Those people create amazing opportunities and new jobs in the economy,” Gates added.
The U.S. government is the biggest donor in global family planning and reproductive health, according to the Kaiser Family Foundation (KFF), a nonprofit focused on health issues. U.S. spending on that front was at $608 million in fiscal year 2018, though the Trump administration has proposed reductions for 2019. Funding levels can reflect domestic and international political debates, especially over abortion, KFF’s website notes. It adds that, since 1973, the government has banned “direct use of U.S. funding overseas for abortion as a method of family planning. …”
The report praised Rwanda for building “an effective health system” that has brought about “the steepest drop in child mortality ever recorded.” In 2005, the country recorded 103 deaths per 1,000 lives births; a decade later, the death rate dropped to 50.
As for HIV infections, the report acknowledged progress in Zimbabwe, where a fourth of all adults were infected in 1997, the peak year of the epidemic.
“Since 2010, new infections are down by 49 percent, and AIDS-related deaths are down by 45 percent,” it noted. But it warned that the youth boom could bring a reversal without continued support for treatment and prevention methods.
Education: While school enrollment and literacy rates have improved, as the United Nations reports, that’s not enough.
“We need to get the quality of education to come up, much like Vietnam has done,” Melinda Gates told VOA.
Students in that country, labeled as low income until 2010, ranked among the best in the world in science in the Paris-based Organization for Economic Cooperation and Development’s most recent assessment of 15-year-olds.
Agriculture: “… We need to make sure that we help countries move from subsistence farming to making real investments” supporting larger-scale operations so people can feed themselves, Gates said.
Ghana provides a good example, she and the report noted.
With its current agricultural productivity and innovations such as new hybrid varieties of maize, the country’s “poverty rate is projected to fall from 20 percent in 2016 to 6 percent in 2030.”
But, the report observed, “There is ample room for Ghana’s agrifood system to keep developing.” For example, “cocoa, the country’s main export crop, is sold raw and processed outside the country. Meanwhile, almost half of all processed foods consumed in Ghana are imported.” Buying food processed in Ghana would keep more money in the country and generate jobs, it said.
Since 2000, more than a billion people have risen from extreme poverty, a level that the World Bank sets at $1.90 a day. Melinda Gates attributed that rise to “investments the world made systematically in human capital: in health, in education, in agriculture. …
“A lot of the gains that we’ve seen can drop back, particularly with a growing population,” she said. “So our message to the world is keep your foot on the gas. Keep the accelerator going.”
President Trump imposed tariffs on an additional $200 billion worth of tarrifs Chinese goods coming into the U.S., continuing an ongoing trade war between the two countries.
The new import taxes begin next week and will rise to 25 percent at the end of 2018.
According to Reuters, smart watches from Apple and Fitbit, as well as some consumer safety products, such as bicycle helmets and baby car seats, are exempt from the new tariffs.
The latest U.S. move could generate a tit-for-tat response from Beijing, which has said it would welcome new trade talks with Washington, but also suggested it would not engage in more negotiations if the U.S. imposed the tariffs.
In the statement announcing the new tariffs, Trump warned that “if China takes retaliatory action against our farmers or other industries, we will immediately pursue phase three, which is tariffs on approximately $267 billion of additional imports.”
In recent months, Washington and Beijing imposed 25 percent tariffs on $34 billion worth of goods headed across each other’s border.
Earlier Monday, White House economic adviser Larry Kudlow told the Economic Club of New York that the U.S. is “ready to negotiate and talk with China any time that they are ready for serious and substantive negotiations towards free trade to reduce tariffs and non-tariff barriers, to open markets, to allow the most competitive economy in the world, ours, to export more and more goods and services to China.
Trump declared on Twitter that the tariff increases he has imposed have boosted the U.S. economy, the world’s largest.
“Tariffs have put the U.S. in a very strong bargaining position, with Billions of Dollars, and Jobs, flowing into our Country –and yet cost increases have thus far been almost unnoticeable,” Trump tweeted. “If countries will not make fair deals with us, they will be “Tariffed!”
With his popularity ratings in freefall, French President Emmanuel Macron is counting on a rebound in family purchasing power to keep voters from turning against his reforms.
Macron’s government has lined up several tax cuts taking effect in the coming months that should boost the closely tracked measure of disposable income in France.
It could hardly come at a better time for Macron, with many voters saying the former investment banker has spent his first year in office cutting taxes for the wealthy and big companies.
More purchasing power was the single biggest priority in voters’ eyes, well ahead of cutting unemployment or the tax burden, according to a Kantar Sofres poll released on Sunday.
Squeezed by tax hikes on petrol and tobacco as well as oil price-driven inflation, household spending has floundered this year whereas it is traditionally the single biggest source of growth, accounting for 52 percent of economic output.
But next month workers will see a cut in payroll tax they pay to fund jobless insurance and the health system, followed by a cut in a city tax for all but the wealthiest in November.
“We are gradually going to improve French workers’ purchasing power,” Finance Minister Bruno Le Maire told LCI television on Monday. “We are going to make work pay better. The French are going to see the fruit of these policies in the coming months.”
With a solid parliamentary election behind him, Macron faced little resistance in his first year in office to a major overhaul of the labour code and the scrapping of the wealth tax.
But it earned him a reputation as a “president of the rich” that has been hard to shake off. A summer scandal over his bodyguard beating May Day protesters has further dented his image, and a popular environment minister resigned live on radio over frustration that Macron’s agenda was not green enough.
With his popularity ratings at all time lows, Macron needs to rebuild political capital before he launches what are set to be contentious reforms to unemployment insurance and the pension system next year, while also trying to cut public spending.
In addition to tax cuts this year, Macron’s government has pledged to scrap payroll tax next year on overtime work and profit participation schemes in small firms.
The central bank said in its latest economic outlook on Friday that the stars were aligned for a rebound in purchasing power starting at the end of this year and into 2019.
“We’re expecting about 200,000 [job creations] this year, that should translate into purchasing power for the French, especially with inflation due to fall,” Bank of France governor Francois Villeroy de Galhau told Europe 1 radio.
The government is counting on the rebound to help the economy grow 1.7 percent next year. While the central bank is optimistic about the outlook for disposable income, it is only expecting GDP growth of 1.6 percent.
Meanwhile, despite the planned tax cuts, questions linger over whether households will actually feel any better off.
From January, taxes will be automatically deducted from people’s monthly pay slip, leaving those who are not already on a monthly plan – about 40 percent of taxpayers — with smaller net take-home pay.
Meanwhile, since the government’s measures to boost purchasing power mainly benefit workers, retirees are likely to be left out. Additionally, while the government has said it will raise the state pension next year it will do so by less than the rate of inflation so as to save money.
A top economic adviser to President Donald Trump said on Monday he expects U.S. budget deficits of about 4 to 5 percent of the country’s economic output for the next one to two years, adding that there would likely be an effort in 2019 to cut spending on entitlement programs.
“We have to be tougher on spending,” White House economic adviser Larry Kudlow said in remarks to the Economic Club of New York, adding that government spending was the reason for the wider budget deficits, not the Republican-led tax cuts activated this year.
Kudlow did not specify where future cuts would be made.
“We’re going to run deficits of about 4 to 5 percent of GDP for the next year or two, OK. I’d rather they were lower but it’s not a catastrophe,” Kudlow said. “Going down the road, of course we’d like to slim that down as much as possible and we’ll work at it.”
He stated that the biggest factor for revenue was economic growth rate. A quicker pace of growth will bring in more revenue, Kudlow said, and Trump’s economic policies were aimed at boosting the U.S. growth rate.
Kudlow also said he did not expect Congress would be able to make the Trump administration’s recent individual tax cuts permanent before the Nov. 6 midterm congressional elections.
“I don’t think it will get through the whole Congress” before the election, he said, but added that making the personal tax cuts permanent “is a good message” and disagreed with forecasts that they would further increase budget deficits.
Aid money urgently needs to be redirected to the poorest countries in order to reach the United Nations’ goal of ending extreme poverty by 2030, according to a report.
The London-based Overseas Development Institute (ODI) says middle-income countries receive more aid than the 30 poorest nations. It also warns that at least 400 million people will still be living on less than $1.90 a day, despite government pledges to eliminate all extreme poverty.
In northern Ethiopia, teams of workers dig irrigation channels through orchards and grain fields. Such projects have turned arid plains into fertile farmland, which has quadrupled agricultural production.
The report from the ODI credits Ethiopia’s “Productive Safety Net Program,” launched in 2005, with lifting 1.4 million people out of extreme poverty. It also enabled Ethiopia to avoid another famine during severe droughts in 2010 and 2015.
In contrast, neighboring Uganda has seen extreme poverty levels rise recently, after a rapid reduction in previous years.
“One of the reasons is because climate change is starting to have an impact in that country,” said Marcus Manuel, author of the ODI report. “Now in Ethiopia, they’ve managed, with a lot of support partly from the U.S., to have programs that support farmers when a sudden climate or weather event happens. In Uganda, they didn’t. So when they had a drought, that led to a real increase in poverty. So it’s a matter of having the right systems in place.”
Ethiopia’s program, the largest of any low-income country, pays beneficiaries to work on public works projects such as irrigation, roads, schools and health clinics, which helps to create long-term poverty relief.
Such programs are vital in ending extreme poverty, according to the ODI report. The report says there is an annual funding shortfall of $125 billion in the three core sectors of education, health and what it terms social protection transfers, or welfare.
“You need to do economic growth to do part of things, and you also need investment in the social sectors,” Manuel said. “You need to have both sides of the coin to make this work. Donors are investing both in growth and in social sectors, but they’re not investing it in the right countries to nearly the extent that’s needed. And, in particular, in this report we’ve identified 29 countries which can’t afford the investment needed in the social sectors and donors are not giving enough money to that group of countries.”
The statistics show middle-income countries receive more aid than poorer countries, whose share of global aid has fallen over the past six years from 30 percent to 24 percent.
In addition to better aid allocation, the report says more donor nations need to reach the U.N. goal of allocating at least 0.7 percent of gross domestic product to aid budgets. Without urgent action, the authors warn the goal of eliminating extreme poverty by 2030 will remain out of reach.
U.S. media reports said Friday that President Donald Trump has instructed aides to proceed with tariffs on $200 billion more in Chinese products.
Citing sources familiar with the matter, Bloomberg and Reuters said the president wanted to move forward with the additional duties even though Treasury Secretary Steven Mnuchin is trying to restart trade talks with Beijing.
The reports sent stocks falling Friday and led to a drop in the Chinese yuan.
The White House did not immediately comment on the reports.
Bloomberg reported that Trump met Thursday with his top trade advisers to discuss the tariffs, including Mnuchin, Commerce Secretary Wilbur Ross and U.S. Trade Representative Robert Lighthizer. The meeting was not on Trump’s public schedule.
Before Thursday’s meeting, Trump said on Twitter that he felt “no pressure” to make a deal with Beijing, saying “they are under pressure to make a deal with us.” He also raised questions about whether new talks between the United States and China would happen, saying the U.S. “will soon be taking in Billions in Tariffs & making products at home. If we meet, we meet?”
A public comment period for the proposed new tariffs ended last week. The U.S. trade representative’s office received nearly 6,000 comments on the proposal.
Even more tariffs
Last week, Trump threatened even more tariffs on Chinese items — duties on another $267 worth of goods, which when combined with the others would cover virtually all the products that China sends to the United States.
“That changes the equation,” he told reporters.
The Untied States has already imposed tariffs on $50 billion worth of Chinese goods, leading China to retaliate on an equal amount of U.S. goods.
The Trump administration has argued that tariffs on Chinese goods would force China to trade on more favorable terms with the United States.
It has demanded that China better protect American intellectual property, including ending cybertheft. The Trump administration has also called on China to allow U.S. companies greater access to Chinese markets and to cut its U.S. trade surplus.
China has threatened to retaliate against any potential new tariffs. However, China’s imports from the United States are worth $200 billion a year less than American imports from China, so it would run out of room to match U.S. sanctions.
The Turkish central bank caught international markets by surprise Thursday as it aggressively hiked interest rates in an effort to strengthen consumer confidence, stem inflation and rein in the currency crisis.
Interest rates were increased to 24 percent from 17.75 percent, which is more than double the median of investor predictions of a 3 percent hike. The Turkish lira surged above 5 percent in response, although the gains subsequently were pared back.
International investors broadly welcomed the move. “TCMB [Turkish Republic Central Bank] did show resolve in hiking the one-week repo rate substantially and going back to orthodoxy,” chief economist Inan Demir of Nomura International said.
The central bank had drawn sharp criticism for failing to substantially raise interest rates to rein in double-digit inflation and an ailing currency. The lira had fallen by more than 40 percent this year.
The rate hike is an apparent rebuke to Turkish President Recep Tayyip Erdogan, who has been opposed to such a move.
Only hours before the central bank decision, Erdogan again voiced his opposition to increasing interest rates. The Turkish president reiterated his stance of challenging orthodox economic thinking, arguing that inflation is caused by high rates, although that runs contrary to conventional economic theory. Erdogan also issued a presidential decree banning all businesses and leasing and rental agreements from using foreign currency denominations.
The central bank indicated further rate hikes could be in the offing. “Tight stance monetary policy will be maintained decisively until inflation outlook displays a significant improvement,” the central bank statement reads.
The strong commitment to challenge inflation was welcomed by investors. “Most importantly, the CBT seemed to be vocal about price stability risks,” wrote chief economist Muhammet Mercan of Ing bank.
Fueled by August’s sharp fall in the lira, which drove up import costs, inflation is on a rapid upward trajectory. Some predictions warn inflation could approach 30 percent in the coming months.
While international markets are broadly welcoming the central bank’s interest rate hike, economist Demir warns more action is needed.
“This rate hike does not undo the damage inflicted on corporate balance sheet, and market concerns about geopolitics will remain in place. So this is not the hike to end all problems,” said Demir.
The World Bank and IMF repeatedly have called on Ankara to rein in spending, which they say is fueling inflation. Perhaps in response, Erdogan has announced a freeze on new state construction projects.
In the past few years, he has embarked on an unprecedented construction boom, including building one of the world’s largest airports and a multibillion-dollar canal project in Istanbul, which the president himself described as “crazy.”
Investors also remain concerned about ongoing diplomatic tensions between Ankara and Washington. The two NATO allies remain at loggerheads over the detention on terrorism charges of American pastor Andrew Brunson.
Brunson’s detention saw U.S. President Donald Trump impose trade tariffs on Turkey, which triggered August’s collapse in the lira. Trump has warned of further sanctions.
“If we somehow sort out our problems with the United States and adopt an orthodox austerity program, we may find a way out of this mess,” said political analyst Atilla Yesilada of Global Source Partners. “Turkey is a country that has a net foreign debt of over $400 billion, and where 40 percent of [Turkish] deposits are in foreign currency, so the game could be over in a day.”
Turkey has a long tradition of carrying out business in foreign currencies to mitigate the threat of inflation and a falling lira. The growing danger of the so-called “dollarization” of the economy and the public abandonment of the lira are significant risks to the currency.
Turkish companies are paying the cost for the depreciation of the lira. Analysts estimate about $100 billion in foreign currency loans have to be repaid by the private sector in the coming year. Companies and individuals borrowing in local currency, however, will be facing higher repayments. And most analysts predict the Turkish economy is heading into a recession.
Economist Demir says, though, that the situation could have been far worse.
“In the absence of an [interest rate] hike, the rollover pressures on banks would get even worse, damage on corporate balance sheets would intensify, and local deposit holders’ confidence would have weakened further. So this hike, although it doesn’t eliminate other risks, eliminates some of the worst outcomes for the Turkish economy,” he said.
Thursday’s rate hike appears to have bought time for the Turkish economy and the nation’s besieged currency. Analysts say investors are watching to see if Turkey’s decision-makers use that time wisely.