February 2014 – ISTANBUL – Turkey’s central bank—beset by political instability, tumbling confidence and one of the world’s fastest falling currencies—said that it will convene an emergency meeting Tuesday, a move that could test whether once-golden emerging markets can avert a destabilizing crisis. Central bankers in many emerging-market countries are under intense political pressure to keep interest rates low to keep economic growth on track, despite the inflationary effects. The global economy began 2014 in its strongest shape since before the global financial crisis in 2008, thanks to recoveries in the U.S. and U.K., economic resilience in China and signs of stability in the euro zone. But recently strains in Turkey and other countries such as South Africa and Argentina have led to steep declines in global equity markets, reviving fears of financial contagion that could derail the expansion. “The health of emerging markets matters more to us than it did in the past,” said Simon Johnson, former chief economist at the International Monetary Fund. “It matters how people are pricing risk [in financial markets], that is increasingly a global issue.” After sidestepping market pressure for an interest-rate increase last week, Turkish central bank Governor Erdem Basci is in a corner. Analysts say he will have to aggressively raise interest rates at the extraordinary meeting to stop the lira’s tumble. The bank was set to issue a statement at midnight local time (5 p.m. EST).
“We need to see a significant hike in policy rates and it needs to be meaningful,” said Tim Ash, chief emerging markets economist at Standard Bank. “In the past the bank has been halfhearted and temporary. The stakes are higher now and the market wants to see a more coherent credible policy.” When the global financial crisis erupted, robust growth in emerging markets cushioned the blow. Since then, the world economy has been driven almost entirely by developing countries as the U.S. and euro zone dealt with the aftershocks of burst housing bubbles and bank crises. Turkey’s economy isn’t large enough, by itself, to disrupt the global economy. Its gross domestic product is $822 billion, according to IMF figures, around 5% the size of the U.S. Still, Turkey could prove a bellwether for other emerging markets trying to combat capital flight and rising inflation without crippling their economies through excessive interest-rate hikes. South Africa, for instance, faces a similar mix of weakening growth and high inflation, putting pressure on its central bank to raise interest rates. “They do not have an easy time of it,” said Nariman Behravesh, chief economist at consulting firm IHS Global Insight, referring to central bankers in emerging markets. “They’re not in an enviable position.” –WSJ