What analysts say about Erdogan’s plan to tighten grip

BANGKOK: President Recep Tayyip Erdogan’s intention to tighten his grip on the economy and take more responsibility for monetary policy if he wins an election next month has fuelled concern about the credibility of the nation’s central bank, analysts said.

The lira declined to a fresh record against the dollar after Erdogan told Bloomberg TV in London that after the vote transforms Turkey into a full presidential system, he expects the central bank will have to heed his calls for lower interest rates.

His comments come days after the lira’s implied-carry appeal versus the rand declined to the lowest in more than a year.

The spread between their potential onemonth carry trades fell to 0.27% per unit of volatility last Friday, and has been little changed since. The currency weakened as much as 0.7% before trimming its loss to 0.3%.

Tsutomu Soma, Tokyo-based general manager for SBI Securities Co’s fixed-income trading said Erdogan’s remarks raise concern about the credibility of the central bank.

“The market probably thinks the Turkish central bank would need to raise rates given the nation’s faster inflation and to halt the declines in their currency, but politicians in general usually don’t like to hike rates.

“That type of comments raise concerns about the independence and the credibility of the central bank, which is a negative for the Turkish currency.”

Kota Hirayama, senior economist for emerging markets at SMBC Nikko Securities Inc. in Tokyo said: “The lira faces further risk of selloffs until the election next month as there will be more comments from officials that will fuel concerns about the country’s outlook.

“It’s still unclear how much more pressure Erdogan plans to put on the central bank; he has been going against the central bank’s move to tighten monetary policy, but he hasn’t really taken action.

“If he’s elected, it would be his first presidency under the new scheme that would allow him to have more power, so it’s hard to gauge what exactly he might do.”

John Hardy, the head of foreign-exchange strategy at Saxo Bank in Hellerup, Denmark said the problem was Erdogan’s interference and the lack of confidence that the central bank has any independence to pursue policies of its own accord.

“The market will punish the lira. That’s why the lira is where it is. It will go lower at least until the election and possibly a negative spiral thereafter if Erdogan makes unproductive moves. Wondering if he is planning on something more drastic like capital controls. The lira could test 4.50 per dollar next month or so and then very uncertain thereafter.”

Ziad Daoud, the Dubai-based chief Middle East economist for Bloomberg Economics said sentiment has been the main reason behind the decline of the lira this year, and Erdogan’s comments won’t improve that.

“Investors have been concerned about government intervention in monetary policy, which is compromising the independence of the central bank.

“The President’s latest remarks will indeed make some uncomfortable. Unfortunately, unnerving investors is that last thing he needs to do if he wants to stabilise the lira.” — Bloomberg