‘This Is Much Worse Than Expected’: Analysts (Still) Struggling To Come To Terms With The Reality Of Erdogan

Thursday was another day when EM watchers expressed incredulity at how obviously beholden Turkish monetary policy is to Erdogan-o-mics.

Regular readers know my position on this – I’m incredulous that everyone else is incredulous. In fact, it’s to the point where I feel like investors and fund managers actually don’t want to get it. I can’t think of another possible explanation for why anyone acts surprised when CBT does something that undermines the lira, again laying bare the fact that there will never – ever – be a time, as long as Erdogan is alive, when it makes sense to conceptualize of the central bank as a politically independent entity.

Last year provided a crash course (figuratively and literally) into just how far Erdogan is willing to go when it comes to commandeering monetary policy. Even when CBT was allowed to fight back in September, it was abundantly clear that what many market participants hailed as a sign that the central bank retained some semblance of independence, was merely a push to stabilize the currency borne entirely out of political expediency (at the time, the diplomatic spat between Washington and Ankara had devolved into the absurd).

Additionally, it is impossible to separate the lira’s late-2018 stabilization from the geopolitical backdrop, which found Erdogan reclaiming the narrative, thanks in no small part to his leverage in the Jamal Khashoggi debacle and Ankara’s decision to release Christian Pastor Andrew Brunson from custody. Turkey ended up juxtaposing Brunson’s release with Prince Mohammed’s apparent penchant for murdering dissident journalists – Erdogan’s point: To remind the world that while tyrannical autocrats like himself may be bad, unelected monarchs with bone saws are immeasurably worse. He didn’t put it that way, but that was the gist of it, and that narrative, in turn, was just a cover story. Erdogan’s determination to sour the international community on Prince Mohammed was the latest episode in the ongoing soap opera that pits Ankara and Doha against the Saudi bloc in various regional and pseudo-regional spats.

At no point during any of that did it make sense to assert that CBT had won back some of its independence (it didn’t have much in the first place, but whatever discretion was left disappeared in July after Erdogan consolidated power). In the same vein, it was never clear why anyone would have assumed that turmoil wouldn’t come calling again in and around important political events. As you’re hopefully aware, last month’s local elections didn’t go particularly well for AKP, resulting in a truly farcical weeks-long effort on Erdogan’s part to try and nullify the Istanbul vote.

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Meanwhile, In Turkey…

At the same time, CBT is doing something silly with the country’s reserves (apparently inflating them with swaps). Those allegations (as originally detailed by the Financial Times last week and then subsequently echoed by other outlets) added to existing market angst about Turkey’s reserve situation.

A draconian crackdown in the days leading up to the local elections (Erdogan essentially trapped everyone in the lira) didn’t help matters in terms of fostering trust and confidence with jaded foreign investors.

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‘Oh Financial Times! What Do You Know’: Erdogan Furious As World Discovers Central Bank Lying About Reserves

All of that brings us not-so-neatly to Thursday’s CBT decision and (surprise!) they dropped their tightening bias. They also appeared to back off the hawkishness more generally, as it relates to inflation.

That, unfortunately, is dovish. “Despite the commitment to keeping policy rates at the current level, the monetary policy committee statement no longer has the ‘ … if needed, further monetary tightening will be delivered'”, BofA wrote Thursday in a fatalistic-sounding quick take. “We think this is a dovish twist.”

Other observers weren’t as generous. “This is much worse than expected and supports the view that policy has gone off the rails”, Win Thin, global head of currency strategy at Brown Brothers Harriman & Co. said.

BlueBay’s Tim Ash was characteristically unamused. “Can someone explain why the CBRT would remove the reference to further tightening, if required?”, he asked, on Twitter. I can answer that: Because Erdogan, that’s why.

“What trends in inflation have there been to justify that change, I just don’t see it. The lira has been weaker and oil higher”, Ash continued, before delivering this:

The only logical explanation for this move is that the CBRT is again coming under political pressure to cut, and this was a sop to those forces.


The lira slid on Thursday in response to the dovish hold. It’s now at its weakest levels since October (i.e., since things started to turn around after the late-summer rout).

Goldman was out on Thursday afternoon with a simple, point-by-point explainer of exactly what’s going on here and what needs to happen next. To wit, from a much longer note:

We see several reasons why rates will need to rise to support the Lira and contain financial risks: (1) We think the recent pressure on the Lira has arisen from local dollarization, as indicated by the share of FX deposits in the banking system; (2) inflation expectations have edged up again in April after falling steadily since November; (3) with the depreciation in the Lira and rise in oil prices, actual inflation is also likely to be higher. We raise our end-year inflation forecast from +13.0%yoy to +14.0%yoy given the most recent forward rates and oil prices, and (4) as net foreign assets of the TCMB are somewhat higher than one month of import coverage, at US$24.1bn as of April 24, and lower once swaps and gold are excluded, we do not see reserves as a sustainable tool to support the Lira, making rates the remaining tool for this purpose, in our view.

The bottom line is the same as it ever was, and the same as it’s ever going to be. No matter how irritated EM watchers get and no matter how incredulous the commentary from analysts and FX strategists following purportedly “inexplicable” decisions, there is nothing “inexplicable” about any of this.

Erdogan is Erdogan and if you wanted to put someone’s picture in the dictionary next to the entry for the word “incorrigible”, he would be a solid choice.


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