Turkey’s Recep Tayyip Erdogan is ready to take his medicine.
Don’t believe me? Just ask him. “Turkey [will] implement bitter pill policies if needed,” he declared on Wednesday, while pledging to support his new central bank governor and finance minister, just days after firing Murat Uysal and accepting the resignation of his son-in-law.
“We will not hesitate to apply the right prescriptions,” he continued. “Even if it is painful.”
I’ll tell you what’s “painful.” What’s “painful” is watching market participants pile back into the lira and Turkish bank stocks despite knowing that Erdogan absolutely cannot be trusted on anything, including and especially respecting central bank independence.
The lira came into Monday riding an eleven-week losing streak, which pushed Turkey back to the brink of a currency crisis. The irony of Uysal’s dismissal is that he did everything Erdogan asked him to do. In his first 14 months on the job, Uysal delivered 1,575bps worth of easing. As for Berat Albayrak, he was naturally just a mouthpiece for Erdogan — they’re family, after all.
Inflation lingered in the double-digits all year as the lira was among the world’s worst performing currencies.
This is a rare situation in which the almost universally applicable phrase “there’s plenty of blame to go around” doesn’t apply. There is only one person to blame. And it’s Erdogan.
His steadfast refusal to accept that Turkey is simply not the place to experiment with the laughably unorthodox idea that rate cuts are the key to a stronger currency and lower inflation is a perpetual headache for EM investors, and his generalized belligerence on all matters related to foreign policy is equally vexing.
Now, the market is supposed to believe that Erdogan has changed his ways and is fully prepared to countenance higher rates if it means reining in inflation and getting a handle on (another) currency crisis.
“Like everywhere else around the world, in our country it is the central bank’s job to determine and implement policies needed to rein in inflation,” he declared on Wednesday, in a laughable attempt to convince the world that he maintains some respect for the idea that monetary policy should be independent.
Simultaneously, Turkey’s banking regulator moved to open up access to lira funding, in a break with Albayrak’s policies. The lira has rallied some 8% this week, and is now back on the “right” side of an 8-handle.
Meanwhile, Turkish equities hit a new record, led by financials.
The BIST banks gauge jumped a ridiculous 9% on Wednesday. That looks like the best session in more than five years.
If you’re keeping score at home, that put the weekly gain at more than 20% through Wednesday.
This is not to be trusted. That doesn’t mean it can’t continue or that new CBT chief Naci Agbal won’t at least try to deliver on expectations for more credible policy. But it warrants extreme caution.
“The lira’s volatility curve is inverted, while the demand for gamma is evidenced by a deep preference for out-of-the-money USD/TRY calls,” Bloomberg’s Ven Ram said Wednesday, adding that “while the changes on derivatives and the waning deficit are supportive of the lira, the skepticism surrounding the currency will take more than just tweaks to lift.”
Now, CBT has to hike on November 19. It is imperative. If they don’t, the market will fade these gains. And right quick, too.
Remember, a Joe Biden presidency in the US is not necessarily friendly for Erdogan. And there is absolutely no chance that Turkey’s pseudo-dictator has changed his mind about the relative merits of his long-held views on interest rates, which he famously dubbed “the mother and father of all evil” in 2017.
On Wednesday, amid the euphoria in the lira and Turkish stocks, Erdogan served up a reminder that this is one leopard who ain’t gonna be changing his spots anytime soon (and analysts absolutely love the leopard/spots metaphor when it comes to Turkey).
“I’m saying it again and let’s never forget that interest is the cause and inflation is the result,” Erdogan reiterated. “God willing, we’ll get over this hurdle and pull inflation down.”