If the situation weren’t so burdensome for the populace, I’d say you have to admire Recep Tayyip Erdogan’s commitment to belligerence. In that regard, he’s a miracle of nature.
During a week that found developed market central banks dialing up hundreds of basis points in rate hikes to combat soaring inflation, Turkey, where inflation is 80%, cut rates. Again.
If you keep apprised of this ongoing tragicomedy, but are fortunate enough not to be affected by it, you’ll be hard-pressed not to laugh. Erdogan’s adherence to his own economic unorthodoxy is the stuff of legend and he adds to that legend at regular intervals. It wouldn’t be too much of a stretch to say Thursday’s chapter counted as the most epic yet.
Turkey doesn’t just have an inflation “problem.” Turkey has an inflation crisis. On the IMF’s estimates, annual inflation will only be higher this year in Sudan, Venezuela and Zimbabwe. Although Turkey is struggling with many of the same problems as other nations in 2022, the proximate cause of the country’s inflation woes is Erdogan’s insistence on the notion that higher rates cause high inflation and vice versa.
Last month, Sahap Kavcioglu, Turkey’s beholden central bank governor, cut rates for the first time since December. The 100bps move blindsided economists and cemented Turkey’s already rock-solid status as a global outlier. On Thursday, he did it again. The figure (below) speaks for itself.
Annual headline inflation was 80.2% in August. Core was 66%. And that’s assuming you trust the official numbers — the figures Erdogan allowed to be released. A series of high profile departures from Turkey’s statistics office this year cast considerable doubt on the veracity of the data. PPI inflation is in the triple-digits.
Kavcioglu on Thursday said ongoing increases in inflation are the result of “the lagged and indirect effects of rising energy costs resulting from geopolitical developments, 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.” If you ask Kavcioglu (and why wouldn’t you?), the disinflation process will start soon, “on the back of decisive measures taken for strengthening sustainable price and financial stability along with the resolution of the ongoing regional conflict.”
The “measures” Kavcioglu referenced are macroprudential initiatives, including the promotion of a somewhat nebulous whole-economy “solution” often couched in nationalistic terms. Earlier this month, he penned a blog post about it.
“The two main obstacles to permanent price stability are considered to be the high level of local currency substitution in household, corporate and bank balance sheets and the persistent deficit in the current account balance compared to advanced and peer emerging economies,” Kavcioglu wrote. “High levels of these two interrelated vulnerabilities reduce the effectiveness of monetary policy by adversely affecting and often weakening the transmission mechanism, increase the sensitivity of the economy to external shocks, and cause the trade-off between growth and price stability to remain high.”
Long story short, Erdogan wants to (and I’m quoting Kavcioglu again) “eliminat[e] dollarization” and do away with “the partial dependence of the country’s economy and its financial system on foreign currency, not temporarily through relative price movements, but structurally and permanently.”
The lira hit a record low at 18.4026 per dollar on Thursday. The figure (below) is an annotated history of farce. Thursday’s levels were consistent with intraday lows hit just before Erdogan unveiled a scheme to protect deposits and avert a bank run late last year.
Suffice to say Thursday’s rate cut isn’t going to inspire much in the way of confidence.
Turkish stocks soared this year as locals sought inflation hedges, but a wild rally in domestic bank shares imploded last week starting with the release of hotter-than-expected core CPI figures in the US. Over five sessions, local bank shares fell more than 30% (figure below).
The plunge was exacerbated by margin calls. On Monday, regulators and brokerages held an emergency meeting. Sources who spoke to Bloomberg said “regulators [saw] no sign of systemic risk.”
Some of the language employed by the central bank in Thursday’s policy statement appeared to presage the onset of a new easing campaign, likely aimed at guarding against any sort of downturn and thereby shoring up Erdogan’s political support.
“Leading indicators for the third quarter point to a loss of momentum in economic activity due to decreasing foreign demand,” Kavcioglu said, before emphasizing how “important” it is “that financial conditions remain supportive to preserve growth momentum in industrial production and the positive trend in employment during a period of higher uncertainty regarding global growth as well as escalating geopolitical risks.”
Real rates in Turkey are now close to negative 70% (figure above).
A few weeks ago, Turkey raised its official full-year inflation forecast to 65%. CBT’s medium-term target is 5%. The current account deficit will be around 6% of GDP, thanks to a record trade deficit.
I’m not sure what else to say about this other than to reiterate the obvious: Erdogan has effectively given up on price stability. During the same PBS interview in which he implored Vladimir Putin to return Crimea to its “rightful owners,” Erdogan said inflation “isn’t a crippling economic threat.”
“You will be facing voters in your country next year for reelection. Do you believe you will win? Or could Turkey go in another direction?” Judy Woodruff wondered. “We have no concerns about winning the elections,” Erdogan responded. “Nobody will replace us, because there is no alternative.”
Erdogan is the king of chaos. I recall when you were writing about him many months ago as he dealt with the rapidly diminishing value of the lira, which today hovers slightly over a US nickel. He’s obviously still working from the same book of instructions. He fancies himself a strongman, thumbing his nose at common sense – and reality itself. He’s sort of nuts.
How is letting the lira run wild going to get Turks to de-dollarize? I mean, they clearly aren’t using that TIPS-like vehicle for lira-holders they announced last year, right? So what exactly is the end-game? Just get people used to inflation and to ignore it, since domestic holders are protected from it?
Well, I think one key here (which is why I closed with the quote about elections) is that Erdogan doesn’t plan to give up power under any circumstances. He’s demonstrated as much time and again. He’ll do whatever he has to do, although I think his assumption (which is probably a safe one) is that he’ll always retain enough genuine support to hang onto power without having to resort to the sorts of measures that’d forever put him in a category he’d rather not be in. To be clear, I’ve followed Erdogan obsessively for years, so I’m fully apprised of what he’s capable of. My point isn’t to suggest he isn’t a full-on dictator masquerading as a soft-autocrat (that’s exactly what he is). Rather, my contention is that inflation or no inflation, enough people support him, and he has enough control over the organs of the state, and Turkey is valuable enough to the West (not that it’d be somehow less valuable without him, it might be more valuable, but he’s a known quantity and a shakeup would be tumultuous at least initially), that he’s comfortable in his position. He doesn’t think inflation will cause (another) coup, and he’s pretty sure he’ll figure out a way to “win” at the polls. Things have a way of working out for him. He’s crafty and he’s made himself synonymous with Turkey, as much as that infuriates his critics, many of whom see him as — you know — a scourge. It’s just difficult for me to imagine waking up to a headline that says “Erdogan Concedes Inflation Mistakes, Gracefully Cedes Power”
Democracy needs capitalism and capitalism needs democracy. Erdogan sees both as a pain in the ass……