When last I checked in on Recep Tayyip Erdogan, his son-in-law was busy joking in Davos about the extent to which Turkey’s central bank is, quote, “as independent as the Fed”.
It was an oblique reference to Donald Trump’s tireless efforts to commandeer US monetary policy and remake the relationship between the White House and the Eccles building in the image of NATO’s favorite autocrat.
“You’re independent but you have to aim for the same target”, Berat Albayrak told a panel discussion in Switzerland last month.
It was a sad comment on the state of US politics, and unfortunately, it’s those types of encroachments (i.e., autocratic overreach) that will make it more difficult for legitimate forms of cooperation between fiscal and monetary policy to take shape in a world where secular stagnation has set in among developed economies.
Erdogan ousted CBT chief Murat Cetinkaya in July, a little less than a year after Albayrak was put in charge of the economy. New governor Murat Uysal knew what he had to do. Uysal delivered the largest rate cut in history shortly after being installed. He subsequently lowered the benchmark another four times including January’s 75bps cut. The total amount of easing under Uysal is 1,275bp.
After last month’s cut, we again warned that Erdogan was taking a big risk by continuing to compel rate cuts at a time when the near-term prospects for further declines in local inflation seemed limited (even if, looking further out, inflation has room to fall further).
Well, sure enough, inflation in Turkey rose to 12.2% in January, data out Monday showed. That exceeded estimates, and it means real rates in Turkey are now even more negative, on par with Japan.
You can delve as deeply into the specifics as you want, but the bottom line is that Erdogan is going to keep pushing for lower and lower rates, something he makes clear whenever he gets the chance. He has variously insisted that rates will be in the single-digits before long, and he’s almost there.
Uysal says inflation will be 8.2% by year-end, which, in the wacky world of Erdogan-o-mics, is how things work. According to Erdogan’s “theories”, the lower rates go, the lower inflation will be.
Unfortunately, that’s just not how things work in reality, which means that eventually, Erdogan is going to run out of luck, likely when internal political turmoil, an exogenous shock, or both, undercut the lira again. Speaking of that, the currency has fallen in nine of the last 10 weeks.
Turkish equities have stumbled lately after a mammoth run higher along with other EMs, as the coronavirus takes its toll on risk assets.
Meanwhile, Erdogan lost his patience with Bashar al-Assad in Idlib after a handful of Turkish soldiers were killed along the border. On Monday, Turkey unleashed the F-16s, killing (or “neutralizing”, as Ankara put it) nearly three-dozen Syrian government soldiers.
Putin controls that airspace, but the Kremlin is apparently going to let this slide – for now, anyway.
“It should be out of discussion to block us”, Erdogan said, essentially imploring Moscow to avoid any kind of action that might curtail Turkey’s ability to respond in the event Assad “accidentally” kills any more Turks. “It is not possible for us to keep silent”, Erdogan added.
Putin obviously isn’t keen on agitating Erdogan, especially not after the two came to an agreement back in October that was generally seen as mutually beneficial.
Still, Putin is keen to help Assad retake Idlib once and for all. Once it falls, Syria’s civil war will be over. It is the last rebel stronghold.
Assad claims his forces were attempting to hit jihadist positions, and a Turkish convoy en route to resupply observation outposts just happened to be in the wrong place at the wrong time. Ankara says the Russian Defense Ministry was fully aware of the convoy’s position. Russia denies that.
Whatever the case, the point is simply that Erdogan is embroiled in all the usual shenanigans (he and Putin back different horses in Libya, too, but as is the case in Syria, they’ve attempted to avoid being openly hostile towards each other), and there’s ample scope for something to go awry that undermines investor confidence.
That’s not to say that any of the armed conflicts (proxy or direct) in which Erdogan is involved have any direct impact on the currency or the economy in isolation. But when you throw in a negative catalyst for EMs as a group (e.g., the virus epidemic) and then add increasingly negative real rates, you’re left with a delicate situation.
Of course, serious investors in Turkish assets are no stranger to any of this. As long as you realize it ain’t for the faint of heart, I suppose there’s no harm in taking your chances. Erdogan does, after all, have a penchant for coming out of any and all potentially ruinous situations largely unscathed.