It’s official: Recep Tayyip Erdogan succeeded in vaporizing all of the lira’s gains logged under Naci Agbal’s brief tenure as central bank chief.
Agbal, who replaced Murat Uysal in November during a shakeup designed to restore market confidence, was ousted on March 19. His dismissal was a flagrant assault on monetary policy credibility, a scarce commodity in Erdogan’s Turkey.
As I put it at the time, the brazen move represented nothing short of an open-handed slap to the face to anyone who was inexplicably inclined to trust Erdogan late last year, when he installed Agbal with the aim of halting a meltdown in the lira.
Agbal largely succeeded thanks in no small part to 875bps worth of tightening in just five months. The final hike (and the accompanying hawkish language) was a bridge too far for Erdogan, whose disdain for rate hikes is the stuff of legend.
On Friday, the lira sank to a new record low (figure below), with the drop apparently exacerbated by dollar-buying tied to repayments on foreign-currency debt.
Agbal’s replacement, Sahap Kavcioglu, shares some of Erdogan’s “unorthodox” (scare quotes because “unorthodox” is an understatement) views on rates, FX and inflation in a country that doesn’t issue a reserve currency and relies on foreign capital. He left rates unchanged at both meetings since taking the reins.
Kavcioglu contends inflation has peaked. At more than 17%, it’s risen for seven straight months.
That leaves real rates in Turkey barely positive (less than 2%).
I’m a broken record on this. Market participants can’t trust Erdogan. He’s an autocrat. And yet, time and time again, EM analysts seem unwilling to throw in the towel and abandon the notion that he (Erdogan) will ever accept a scenario where a central bank governor does what’s necessary to restore faith in the currency.
TD’s Cristian Maggio put it best back in March. “Monetary policy in Turkey is not set up to control inflation — it is a pure function of the pro-growth inclinations of the government,” Maggio wrote, adding that,
It also responds reactively (and usually with a strong lag) to uncontrolled currency weakness. Which means the implicit mandate of a CBT governor is not to achieve 5% inflation, but to make sure that the credit impulse remains in place, while avoiding a collapse of the Turkish lira.
That’s an impossible balancing act.
Erdogan invariably exacerbates the situation by inflaming tensions with Washington and NATO. He did it again this week by adopting a somewhat conciliatory stance towards Belarus following Alexander Lukashenko’s brazen decision to intercept a passenger plane in order to capture a dissident. “Turkey pushed NATO allies into watering down an official reaction to the forced landing,” Reuters said, citing a pair of diplomats.
In any event, this is just another episode in Erdogan’s ongoing battle to keep control of the currency without sacrificing growth (and, perhaps more importantly, his pride).
As Bloomberg noted Friday, “Turkish companies have to roll over $6.9 billion of foreign-currency loans in June, the biggest refinancing hump through March 2022.”
