lira turkey

Cold Turkey: Currency Crisis Looms For NATO’s Favorite Autocrat

Ok, so I know it’s been a rough stretch for everyday Turks.

In fact, it’s somewhat ironic that Turkey is the corridor for Mid-East refugees as you’d certainly think that between the incessant violence and Ankara’s transition to a completely autocratic form of government, it would be the Turks themselves fleeing to Western Europe.

But while I do have quite a bit of sympathy for the country’s citizens, it’s still amusing to watch President Recep Tayyip Erdoğan squirm as the country’s currency collapses.

For those who may not be familiar with the backstory, Erdoğan has never been much on sharing power and the idea that Turkey is a democracy has become something of a standing joke.

After the pro-Kurdish HDP put up a stronger than expected showing at the ballot box in the summer of 2015…


…Erdogan essentially nullified the election results by undercutting the coalition building process on the way to calling for new elections (gun to his head) to be held around four months later.

In the interim, Erdogan reignited the government’s long-running feud with the PKK (designated as a terrorist group by Turkey and the US). A wave of violence followed, some of which was blamed on ISIS who Ankara has been variously accused of covertly supporting. Erdogan cited the bloodshed as a reason why the country needed a strong leader. Unsurprisingly, Erdogan’s AKP performed better in the November 2015 election redo. That paved the way for the President to consolidate his power and vest more authority in the presidency.

Subsequently, Erdogan arrested damn near everyone who said anything even remotely critical of the government. That included journalists, doctors, academics, etc. etc. The purge intensified after last July’s failed military coup.

When it comes to markets, the President fancies himself something of a rates strategist. More specifically, Erdogan has all but demanded that the central bank keep rates low to support the economy. Last August, he warned that Turkey’s lenders risked being accused of “treason” if they didn’t move to keep the economy afloat by ensuring that credit was readily available. Then, in November, he said the following just prior to the central bank’s decision on rates:

“Turkey’s real interest rate is among the highest in the world. That makes me very uncomfortable… We need to change that. I am calling on lenders: please reduce interest rates to reasonable levels. Look at unemployment in the country. If we want growth, we need employment, investment and competition. Unemployment is above 11 percent; is this what this country deserves?

Heisenberg translation: “I’m about to lose my shit over here with this interest rate thing. You either get with the program and get these rates lower or maybe I’ll decide you’re an enemy of the state.”

Well, the central bank raised rates anyway. It didn’t matter. The lira almost immediately reversed its knee-jerk gains. “There was little in the central bank’s statement that suggested this was the beginning of a hiking cycle,” a Nomura strategist said at the time. “At this stage the central bank was not able to pre-commit to further hikes ‘if necessary’ and therefore this remains more like wishful thinking.”



Yes, “wishful thinking,” and indeed the central bank remained on hold in December, surprising analysts who had forecast a hike (one certainly imagines Erdogan might have had a “heart to heart” with CBT officials between the November and December meetings). Here’s a comparison of the central bank’s statements:


(Table: Barclays)

Well, now they’re in deep shit (new readers will note that I don’t mince words). Inflation is running high, the current account deficit is widening (see today’s data), and it certainly appears as though the market is prepared to test the central bank’s willingness to risk a confrontation with Erdogan. Here’s some color from Nomura and BofAML, respectively (via Bloomberg):

Doesn’t see room for such “decisive monetary policy action” in current political environment and expects further currency weakness, London-based Nomura economist Inan Demir says in e-mailed note.

  • “We continue to think that a large interest-rate hike is necessary, but policy inaction and the consequent TRY depreciation since November mean that the size of the necessary hike has grown”
  • The lira’s depreciation since end-September could push headline inflation up by 3.6 percentage points “all else being equal”
  • Expects a 25–50bp hike at MPC meeting on Jan. 24, which “is unlikely to reverse the tide against TRY”
  • Says Wednesday’s balance of payment data shows pressures in the capital account have intensified; “Turkey, in addition to financing the USD2.2bn currentaccount deficit, had to plug the gap of USD2.7bn of portfolio outflows”
  • While he can’t rule out FX sales by the central bank, the policy maker’s gross reserves cover less than 6.5 months of imports and net reserves only cover 2 months, so “there is the risk that spending from already-weak reserves to prop up the currency may actually be counter-productive”

100bp hike in 2017 will bring policy rate into line with EM peers and improve capital inflows given inflation will get close to 10%, Merrill analysts Ferhan Salman, Anton Fedotov, Osman Memisoglu and Yavuz Uzay write in e-mailed report.

  • “We expect this to be front-loaded in the first half of the year”
  • Baseline is $/TRY ~3.6 in 1H, recovery to 3.4 by end-2017
  • TRY appears fairly valued from currentaccount perspective, implies virtually no net external borrowing – but overshoot risk remains in case of spike in US rates or dollar.
  • “Equities look cheap, but leverage and bank-asset quality are concerns, we see buying opportunities but would be selective”

Finally, here’s Citi summing things up and highlighting just how volatile the lira has become:

Looking ahead, we believe that it will be increasingly difficult for the CBT to maintain its accommodative stance and ignore the underperformance of the lira. This view is based on the potential adverse consequences of the exchange rate depreciation for the inflation outlook and financial stability. Concerning the latter, as was evidenced by the December inflation outcome, we believe that Turkey’s disappointing performance regarding price stability is becoming more of a drag on the country’s competitiveness under current global conditions.

Against this backdrop—coupled with the sharp increase in FX volatility (Figure 3) and the possibility of inflation reaching double digits in April/May—we believe that it is becoming increasingly costly for the CBT to delay tightening. In our opinion, attempts to do so risk a sharper response later, which could have severe consequences for the real economy.


And for anyone who thinks I’m being needlessly hyperbolic when it comes to describing what dire consequences could befall central bank officials should they defy Erdogan and raise rates too quickly, just ask Bilgin Ciftci, a medical doctor who was put on trial in 2015 for the “high crime” of likening the President to Gollum from the Lord of the Rings trilogy..


1 comment on “Cold Turkey: Currency Crisis Looms For NATO’s Favorite Autocrat

  1. Mike O says:

    Venezuela 2.0 – without the oil reserves. Good luck, Mr Erdogan. Why is it that we keep trying the same failed policies and practices over and over?

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