Erdogan defiant in the face of financial crisis
INVESTORS SAY THE $900B ECONOMY WAS ALREADY HEADED TO A CLIFF
As investors brace for the Turkish Lira to start trading again in Asia, all eyes were on Erdogan yesterday after he gave a series of defiant speeches over the weekend.
Turkish President Recep Tayyip Erdogan yesterday slammed the crash of the lira amid a widening spat with the United States as a “political plot” and said his country would instead seek new markets and new allies.
“The aim of the operation is to make Turkey surrender in all areas from finance to politics. We are once again facing a political, underhand plot. With God’s permission we will overcome this,” Erdogan told his party members in the Black Sea city of Trabzon.
Erdogan said if the US sacrificed its relations with Turkey, his country would answer by seeking “new markets, new partnerships and new allies.”
The big question now is how far the lira could fall today when trading resumes. The currency fell as much as 17 per cent against the dollar on Friday, fanning fears that the financial tumult could infect Europe and faraway emerging markets.
Old malaise
While the trigger for the stunning debacle was new US sanctions on Turkey, many investors say the $900 billion (Dh3.3 trillion) economy was already headed toward a cliff. Years of a growth-at-all-costs policy bias have left its companies saddled with hundreds of billions of dollars in foreign debt, runaway inflation and one of the world’s largest current-account deficits.
The knock-on was instant. With the turmoil in Turkey fuelling contagion fears, investors shunned riskier assets and sought safety in developed nations’ bonds. Treasuries and bunds rallied. South Africa’s rand, the Argentine peso and global stocks fell.
The euro sank as much as 1.2 per cent to the weakest in a year against the US dollar amid concern about European exposure to Turkish banks.
Interest rates are a “tool of exploitation,” Erdogan said in a second speech on Saturday in Rize. “We are aware that the issue is not the dollar, euro, gold ... These are the bullets, cannon balls, missiles of the war started against us.”
Investors worry that Erdogan is standing in the way of interest-rate hikes needed to stabilise the currency and some are now saying that only extreme measures could bring Turkey back from the abyss. Previously taboo topics like an international bailout or the imposition of capital controls are now being discussed in Turkish and international financial circles.
There were signs of alarm among Turkish citizens. Visits to three different bank branches in Istanbul on Friday indicated that requests for foreign-currency withdrawals had increased.
Three, four, five, six ... What next? Turks have over the last half decade counted the rapid depreciation of the Turkish lira on the screens outside doviz (exchange) booths with a mixture of bewilderment, alarm and ironic amusement.
The currency had spent much of 2014 hovering at just over two to the dollar but broke through the three mark for the first time after the 2016 failed coup bid and then slid to four earlier this year.
But the haemorrhaging reached an unprecedented intensity in the last weeks as Turkey’s ties with the United States strained further and markets questioned their trust in Turkish policymakers, pushing the currency to five against the dollar.
A new bout of selling Friday on increased strains with the US forced the lira over six against the dollar for the first time, with the currency at one point shredding a quarter of its value in a single day.
Economists say that while the government may be tempted to muddle through the current situation in the hope the external and economic background improves, the lira’s fall harbours considerable dangers for the economy, in particular the banking system.
‘Tight grip on bank’
President Recep Tayyip Erdogan’s current dash for growth coupled with unorthodox pronouncements on monetary policy — including that lower rates can bring down inflation — have put him on a collision course with markets.
The central bank, nominally independent but never defying Erdogan, appears to have abandoned the conventional monetary policy of using rates hikes as a tool to support the currency and bring down inflation.
Erdogan’s “tight grip” on the central bank and the fact “higher interest rates do no fit with Turkey’s economic growth strategy” meant that the central bank has kept interest rates on hold, Nora Neuteboom, economist at ABN Amro, said.
“Erdogan’s aim is to improve the economic position of households,” she said, adding the government wanted to “keep the music playing” even as external and internal imbalances grow.
After his June 24 election victory, Erdogan put his son-in-law Berat Albayrak in charge of a newly expanded finance ministry while a new presidential system did away with the office of prime minister, whose last incumbent Binali Yildirim had on occasion urged caution in economic policy.
The new system also increased Erdogan’s control over the central bank, which on July 24 baffled markets by leaving rates unchanged despite inflation that in July came in at 15.85 per cent.
“The markets have lost confidence in the triumvirate of President Erdogan, his son-in-law as finance minister and the Turkish Central Bank’s ability to act as it needs to,” said Charles Robertson, global chief economist at Renaissance Capital.
According to the Capital Economics consultancy, the plunge in the lira risks putting further pressure on the banking sector in Turkey due to the scale of the credit boom and one third of bank lending being denominated in foreign currencies.
“If some of these vulnerabilities crystallise they could tip the economy into a full-blown crisis,” said its economist Yasemin Engin.
US investment bank Goldman Sachs alarmed investors with an assessment that a further drop in the lira to 7.1 to the dollar “could largely erode” the excess capital of Turkish banks.
Erdogan’s base unconcerned
The external value of the lira is not a prime concern of Erdogan’s core supporters, many of whom have no plans for foreign holidays and readily accept government rhetoric that economic problems are caused by outsiders seeking to weaken Turkey.
“I have full confidence in this government, I’m sure it will find a way out and reverse the trend,” said Erdogan supporter Sabahattin.
Should the woes of the lira risk feeding into a wide-scale economic crisis, the government still has levers at its disposal. It could impose capital controls on forex transfers or even call on the IMF for bailout help, although economists regard the former an extreme measure with only marginal probability and the latter unlikely given one of Erdogan’s proudest achievements was paying off Turkey’s IMF debt in 2013.
But he could also swallow his pride and allow the central bank to make an emergency rate hike as it did on May 23 one month ahead of the elections, when a 300 basis points hike in the headline rate was announced.
“Erdogan is pragmatic,” commented Neuteboom. “And if the situation continues to deteriorate he will in the end give in.”