It’s back to lamenting the lira.
When it became clear last month that Recep Tayyip Erdogan wasn’t going anywhere in Turkey, market observers breathed a heavy sigh, and not from relief. Rather, an exasperated sigh at the prospect of more Erdoganomics. At the least, Erdogan’s election victory+ meant a wholesale abandonment of the policies that’ve frustrated EM watchers for years was out of the question.
But an underappreciated risk was that Erdogan, having secured another term, might nod in the direction of orthodoxy, to the further detriment of the currency. In simple terms: The lira was damned if he did (stick assiduously to his own unorthodox script) and quite possibly damned if he didn’t.
Fast forward a couple of weeks and the lira is riding a 12-day streak of losses. The multi-standard deviation move culminated Wednesday in what, at least intraday, looked like the largest decline for the currency since late 2021, when Kemal Kilicdaroglu, Erdogan’s challenger in last month’s election, questioned Erdogan’s mental health amid a series of rate cuts that pushed Turkey to the brink of an outright currency crisis.
The irony is that Wednesday’s decline was attributable not to another turn for the unconventional, but rather to state banks pulling back from the kind of FX intervention which bled the country’s reserves. Long story short, Erdogan’s new economic team, under Merrill veteran Mehmet Simsek, is attempting to reestablish something like credibility with markets.
As anyone who’s even vaguely familiar with the situation knows, Simsek isn’t new. He occupied key government posts for nearly a decade before a nepotistic turn in 2018 when, a year on from a landmark referendum which imbued the presidency with expanded powers, Erdogan’s first order of business upon winning the first post-referendum election was to put Berat Albayrak (his son-in-law) in charge of the economy. Albayrak replaced Simsek, to the extreme chagrin of incredulous EM “experts” (note the scare quotes).
Now, Simsek is back, at the pleasure of Erdogan, promising “transparency, predictability, consistency and compatibility with international norms.” The problem is twofold. First, making good on that promise could be painful, because if you let the market determine the exchange rate, the lira is likely to keep sliding. Second, “transparency, predictability, consistency and compatibility with international norms” is diametrically opposed to the “permanent liraization” plan hatched by Erdogan and Sahap Kavcioglu, Turkey’s hopelessly obsequious central bank chief.
Obviously, Turkey can’t afford to keep burning reserves to defend the lira, but then again, that’s been true for a while. I almost hesitate to use the chart shown below. Turkey doesn’t really have any reserves. CBT’s lira defense is effectively funded by domestic banks and borrowing from benefactors (e.g., Qatar). This is hardly a new concern, but it bears repeating: It’s not clear (or at least it isn’t to me) that Turkey’s banks could make good on citizens’ hard currency deposits. The money is loaned to Kavcioglu, and he spent it defending the lira. The figure below shows gross reserves.
I’m not sure this is “fixable.” Letting the lira plunge to avoid burning (illusory) reserves would only increase local demand for dollars, which is untenable. Erdogan surely knows that, and Kavcioglu isn’t going to embark on an aggressive rate-hiking campaign. So, it seems to me that Simsek is star-crossed — doomed to fail. I’d be surprised if he lasts six months in the position.
It’s tempting to conclude that Turkey is destined for some manner of financial crisis, but Erdogan has a penchant for defying grim predictions about the purported inevitability of an IMF program.
The tragedy for locals exhausted with the situation is that absent a complete meltdown, it’s unlikely that Erdogan will ever lose (“cede” is probably more accurate) power. It’ll take a crisis to dislodge him, which means that much like the lira, Turks anxious for change are damned if they do and damned if they don’t.
