On Monday, NATO’s favorite autocrat (and noted soccer enthusiast) Recep Tayyip Erdogan secured a re-run of the Istanbul municipal election.
EM observers expressed the usual incredulity at Erdogan’s authoritarian audacity, but truth be told, the only surprising thing about this situation is that it took him as long as it did to nullify the vote.
Headed into March’s local elections, the key thing to understand was that while Erdogan would be willing to accept a less-than-perfect outcome, the prospect of a sweeping defeat was a non-starter. He would, we argued, nullify selected results by dictatorial decree before he would accept a result deemed too damaging to the party.
Sure enough, that’s exactly what happened. Erdogan’s willingness to stomach the Istanbul result was diminished further by ongoing questions about how the central bank accounts for reserves (they’re inflating them with swaps). Those questions piled still more pressure on the currency less than a month after Turkey resorted to a draconian crackdown that saw Erdogan effectively trap investors in the lira after it fell some 5% against the dollar the previous week.
Some assumed that with the currency under pressure, Erdogan would be loath to overturn the Istanbul vote for fear of damaging sentiment further and otherwise irritating foreign investors (Turkey needs foreign investment, obviously). But anyone who assumed that was just as wrong as they were last year to assume that Erdogan would fold under pressure when the lira looked to be on the verge of collapse in August. On April 25, CBT dropped their tightening bias, a clear concession to Erdogan.
The reason market watchers consistently get this wrong is that they are employing the exact opposite of the “logic” (and the scare quotes are there for a reason) that Erdogan employs. He couches everything in terms of international conspiracies. (The Istanbul vote was influenced by 43 polling station officials who have links to Fethullah Gulen, the Financial Times story about CBT inflating reserves with swaps is evidence that foreign media is trying to topple his government, etc.)
EM managers see the acceptance of the Istanbul results and, for instance, the countenancing of CBT’s tightening bias, as logical things to do if Erdogan wants to restore confidence. But Erdogan sees those things as concessions which, if made, would undermine his general narrative, revolving as it does around the idea that if nefarious actors would leave the Turkish economy alone, everything would be fine.
Long story short, he isn’t going to be making any concessions barring an outright economic calamity that forces him into the arms of the IMF, and if last August was any indication, even that’s not a sure bet (many outside observers suggested Ankara needed an IMF lifeline during the depths of last summer’s lira collapse, but Erdogan was having none of it).
He reiterated all of this on Tuesday, calling the steady deterioration in Turkey’s main economic indicators since the 2016 coup attempt “clear evidence of the increasing number of attacks against the Turkish economy”.
Erdogan continued, insisting that “whatever we did to the terrorists threatening our borders, we will do the same” to anyone who is engaged in an effort to sabotage the economy. His remarks came in a televised address to AKP at parliament.
That latter bit appears to be a reference to the PKK (and Kurds in general), which, if taken literally, means Erdogan has just threatened to bomb, shell and otherwise fire on, economic saboteurs. Of course, he doesn’t mean it literally, but you get the point. Erdogan is the living embodiment of the word “obstinate” and he has a remarkable penchant for rallying when the chips are down, like the geopolitical equivalent of an NBA star putting together a 25-point fourth quarter in an elimination game (see here, for instance).
During Tuesday’s speech, he went on to claim that a re-run of the Istanbul vote would actually strengthen Turkey’s democracy (cue nervous laughter).
Predictably, Turkish stocks fell, with the Borsa Istanbul again wiping out YTD gains, dropping to the lows seen in late March just prior to the local elections (top pane).
Turkish bank stocks led losses, falling more than 2% (bottom pane) to their lowest since January.
The lira, meanwhile, has fallen for three straight days and is now the weakest since early October. A 7-handle is now very much in the cards.
“We see a risk of a vicious circle, whereby the TRY weakening leads to higher inflation and so to tighter monetary policy, while there could be a second dip in economic activity”, Credit Agricole wrote Tuesday, adding that “it creates more economic and political uncertainty at a time when the economic situation is precarious”.
That is correct, but again, acknowledging that his own actions are to blame for all of this isn’t something that Erdogan is going to do, which means that if the lira does continue to fall and inflation re-accelerates, there is no guarantee Turkey will do what’s necessary with monetary policy. It’s far more likely they’ll resort to half-measures and crackdowns like the one mentioned above.
CHP has decided not to boycott the June 23 re-run in Istanbul. That’s noble of them, but you’d be forgiven for thinking the outcome is a foregone conclusion.
What will surely be maddening for EM watchers is that if the lira continues to tumble ahead of the re-do next month, Erdogan will likely double and triple down on the rhetoric making it even less likely that he’ll allow a fair vote.
Such are the vagaries of investing with an autocrat.