Turkey kept rates on hold Thursday which, to the uninitiated, probably doesn’t sound like news.
But it is. News, I mean. And even if it wasn’t, I’m overdue for a trip through recent events in Turkey.
The country is grappling with another one of Recep Tayyip Erdogan’s regularly scheduled currency crises, but unlike some of the more harrowing such episodes witnessed over the past five years, the lira’s most recent bout of depreciation is more slow-motion train wreck than uncontrolled dive.
The figure (below) is an updated version of my painstakingly annotated lira chart. It shows the recent history of Erdogan’s efforts to find the “right” central bank governor, as well as last year’s existential panic which prompted the institution of a desperate deposit protection scheme aimed at averting a total collapse.
The red star (and accompanying quote) marked peak defiance. The gray-shaded area illustrates the comparatively gradual depreciation that’s unfolded in 2022.
The problem is the same as it ever was: Erdogan says higher interest rates cause inflation and, ultimately, currency depreciation. The only (or best) way to bring down inflation, according to Erdogan, is to cut rates. That’s the exact opposite of how the world really works, and as I’m always keen to remind readers, economic orthodoxy, however questionable when applied to developed markets with sufficient monetary sovereignty, does apply to most emerging markets.
Whether Erdogan actually believes what he says about the relationship between rates, inflation and the currency is debatable. It’s difficult to disentangle what sounds like lunacy from political expediency, and although rampant inflation is a political death knell, Erdogan habitually cites foreign conspiracies for the country’s currency woes, a tactic that arguably serves him well, even as it often manifests in patently absurd accusations.
Whatever the case, central bank governor Sahap Kavcioglu has managed to keep his job largely by ascribing to Erdogan’s theories and putting them into action or, in the case of 2022, inaction. Kavcioglu delivered four consecutive rate cuts late last year, despite knowing full well the moves would worsen the lira’s already egregious slump. December’s cut risked triggering an outright economic crisis. Subsequently, Erdogan devised a convoluted plan to avert a bank run, while state intervention arrested the currency’s slide. But the writing was on the wall: Additional rate cuts weren’t feasible.
Instead, Kavcioglu simply kept rates on hold, which, in world where developed market central banks, including the Fed, are aggressively tightening policy to fight inflation, is more than enough to push the lira inexorably lower. Inflation in Turkey hit 70% on a YoY basis in April.
The figure (above) speaks to just how far afield Erdogan really is at this juncture.
Unfortunately, that may not capture the scope of the problem. Last week, Cem Bas, who oversaw the compilation of Turkey’s inflation statistics, resigned, citing health reasons. The move came just four months after TurkStat’s president was replaced after less than a year in the position. According to ENAGroup, an independent body comprised of academics who produce their own price gauge, inflation last month may have been above 150% YoY.
“Turkey’s latest gross FX reserve data revealed a shocking $4.8 billion drop in the week of May 6-13, taking gross reserves down to $61.2 billion, the lowest level since mid-2021,” TD’s Cristian Maggio wrote last week, calling the decline “very significant even by Turkey’s standards.”
The drop “denotes growing difficulties in keeping the lira stable amid intensifying headwinds,” Maggio went on to say, adding that Bas’s resignation “rais[ed] concerns on government meddling with inflation data [and] came minutes prior to a sharp USDTRY retracement that [looked] suspiciously like intervention.”
Based on official statistics, Turkey’s implied real rate is negative 56% (figure below).
Although I’m not certain, I can’t imagine that’s not the lowest on Earth. If ENAGroup’s estimate is correct, real rates in Turkey are around negative 136%.
“The increase in inflation is driven by rising energy costs resulting from geopolitical developments, temporary effects of pricing formations that are not supported by economic fundamentals, strong negative supply shocks caused by the rise in global energy, food and agricultural commodity prices,” the central bank said Thursday. “The Committee expects the disinflation process to start on the back of strengthened measures for sustainable price and financial stability along with the decline in inflation owing to the base effect and the resolution of the ongoing regional conflict,” the May statement added.
Speaking of “ongoing regional conflict,” Erdogan met with the army on Thursday. There’s palpable concern he’s poised to launch another cross-border offensive against the YPG, America’s Kurdish allies in Syria, who Erdogan equates with the PKK. In 2019, Erdogan embarked on a bloody campaign against the group, which some (read: everyone, including Republicans) blamed on Donald Trump’s withdrawal of US troops.
A new offensive would create another foreign policy headache for the Biden administration, and although Erdogan has long planned additional military action, the timing coincides with Ankara’s opposition to Finland and Sweden’s NATO ascension plans. Erdogan faults NATO for not supporting his efforts to eradicate the PKK.
It’s possible Erdogan is attempting to deflect attention from the inflation problem. On Thursday, just two hours before the central bank decision, Turkey said it detained ISIS’s new leader.
Earlier this week, Devlet Bahceli, leader of nationalist MHP, blamed Fethullah Gulen for spiraling inflation. Erdogan faults Gulen for everything under the sun, and has accused Sweden and Finland of providing a safe harbor for Gulenists and PKK terrorists.
Bahceli told lawmakers that Gulenists are “in the middle” of a “plot” to “direct” prices higher in Turkey, with the help of “hot money gangs,” “global usurers,” “economic hitmen” and “imperialist spies.” On Tuesday, Erdogan said he’ll no longer speak to Greek Prime Minister Kyriakos Mitsotakis, who he (Erdogan) said is also sheltering Gulenists.
“We’re cutting interest rates. And we will all see how inflation will start falling within months,” Erdogan said, on December 20. Inflation was “just” 36% at the time.
I’ve been involved with Turkey pretty continuously since 1969, so this is the 3rd or 4th time I’ve seen this movie. Erdo has forgotten that these are the economic circumstances that brought AKP to power 20 years ago. Or maybe he believes he’s tamed the military and is invulnerable.
In my opinion — and with sincere apologies to everyone in Turkey for whom his never-ending tenure is a disaster — he’s no idiot. He’s extricated himself from more vexing situations than I thought possible, and somehow, despite all evidence to the contrary, he’s managed to preserve a tiny shred of legitimacy among Western leaders. He’s not viewed through the same lens as Putin or Xi, or even Orban. And he does have a lot of legitimate (depending on your definition of “legitimate”) domestic support. I’ve only been following Erdogan closely for ~9 years (which sounds like a lot to most readers, but as you probably know, it’s actually quite a short timeframe in this context), but I’m continually “impressed” with his capacity to come out unscathed, where “impressed” is obviously a misnomer I use only because I don’t really have a more politically correct adjective.
H- Can’t disagree. He’s beaten the odds so far. He is not a dope. But the economic pain for even his most populist supporters has to become unbearable sometime. The deposit guarantee scheme he cooked up a few months ago is bound to blow up.