Turkey careened into one of its regularly scheduled currency crises last month, when a laundry list of factors conspired to send the beleaguered lira tumbling in the longest weekly losing streak since 1999.
The currency’s myriad problems had one thing in common: Recep Tayyip Erdogan.
In September, the central bank delivered a larger-than-expected rate hike in a bid to help stabilize the situation. Just weeks later, when given the opportunity to follow up, governor Murat Uysal eschewed an encore, opting instead for a weak-willed half measure that recalled previous manifestations of CBT balking in the face of pressure from the executive. The market was not amused.
Any CBT governor has an impossible task. Erdogan’s famously unorthodox economic views generally hold that cutting rates is the best way to reduce inflation and stabilize the currency. Obviously, that isn’t tenable for an emerging market like Turkey, but he insists on it, and because he’s an autocrat, you can’t tell him no.
Uysal, who replaced Murat Cetinkaya in July of 2019 after Cetinkaya failed to slash rates fast enough to appease Erdogan, delivered a total of 1,575 bps worth of easing during his first 14 months on the job.
But it wasn’t enough. With the lira having plunged all the way to ~8.51 this week, Erdogan removed Uysal by presidential decree early Saturday. Naci Agbal was appointed new governor.
On Sunday, Erdogan’s son-in-law, Berat Albayrak, resigned as finance minister.
The lira fell for an eleventh consecutive week through Friday, as the prospect of a Joe Biden presidency weighed on the currency.
There are multiple problems, one of which is simply Erdogan’s refusal to let the central bank do its job, preferring instead to blame foreign conspirators for the currency’s trials and tribulations.
That’s hardly the end of it, though. Erdogan landed in a bitter war of words with Emmanuel Macron last month, and Turkey’s maritime dispute with Greece didn’t help. But the pressing issue now is a Biden presidency. Ankara is still embroiled in a spat with the US over Erdogan’s insistence on operating the Russian missile systems he bought. Sanctions are still on the table in connection with those purchases, and more generally, Erdogan likely won’t be able to get away with the kind of deadly shenanigans Trump countenanced if Biden does in fact win The White House. Recall, for example, that Trump allowed Turkey to invade northern Syria in October of 2019 to disastrous effect. Trump’s allies (from Rudy Giuliani to Michael Flynn) have connections to Erdogan, and there’s speculation that the current administration helped out as best they could with the notorious Halkbank case.
In any event, I can’t imagine the market is going to particularly enamored with Erdogan ousting a second central bank governor in the space of 16 months. Inflation rose nearly 12% in October from a year earlier. Food costs jumped 16.5%.
The central bank, under the outgoing Uysal, hiked its year-end inflation forecast to 12.1% last month. That was more than three percentage points higher than the previous projection.
EM strategists have a rather amusing tendency to adopt cautious optimism on the lira and on Turkey more generally, despite Erdogan letting them down at every conceivable turn. I can’t wait to hear the hot takes on this.