Bitter pills, Erdogan’s possible remedies for Turkey crisis
ISTANBUL: The crash in the Turkish lira sparked by US sanctions has left President Recep Tayyip Erdogan facing the biggest economic challenge of his one-anda-half decades in power.
The lira has recently clawed back some of its losses, but economists say Turkey still urgently needs to address imbalances in its economy and avert a full-blown crisis.
The fragility of the currency was highlighted again on Friday when Standard and Poor’s and Moody’s both downgraded Turkey’s debt ratings within hours of each other.
The lira closed a volatile week of trading at just over six to the dollar, off the lows of over seven earlier in the week, but still sharply down from the start of the month, when it had been changing hands at under five to the dollar.
Economists say Turkey must act to prevent risks spreading to the European and even global economies.
Erdogan has a number of mechanisms at his disposal. But they could prove bitter pills for the Turkish strongman to swallow.
Even before the crisis broke, economists were urging Turkey to raise interest rates sharply to prop up the lira and rein in inflation.
But Erdogan – who sees his overriding priority as boosting growth – adamantly refuses, with economists worried that the nominally independent central bank is firmly under his control.
With its hands apparently tied when it comes to raising the headline borrowing rate, the central bank has provided banks with more liquidity, while also quietly using a mechanism that allows de-facto rate increases on a daytoday basis.
William Jackson, economist at Capital Economics in London, said that while “the sense of acute crisis” had faded, “policymakers only really seem to have done the minimum needed”.
Financial markets are also sceptical about Erdogan’s ability to resolve the current crisis, especially after he named his son-in-law Berat Albayrak as finance minister last month.
Erdogan’s unorthodox beliefs have not helped, with the president repeatedly baffling markets by suggesting that low interest rates are needed to bring down inflation.
Moody’s said Turkey lacked a “clear and credible plan” to deal with the challenges while S& P said the response from Ankara so far had been “limited” despite the mounting risks.
Albayrak on Friday insisted that bringing down inflation was a priority for Turkey. But markets want to see actions rather than words.
“Turkey’s economic crisis is far from over,” said Mujtaba Rahman, managing director for Europe at Eurasia Group, calling for a “credible programme of fiscal consolidation and economic reform”.
Economists have long warned that Turkey’s high inflation, widening current account deficit and vulnerable banking sector harboured risks.