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bne June 2018 Cover Story I 25
As the markets garrotted the lira, Turkey’s president gave up on any idea he had of continuing to stand defiant against an interest rate hike. But if he is re-elected in late June will the markets trust him to keep a rational hand on the economic tiller? Is Turkey already doomed to suffer a financial crisis?
President Recep Tayyip Erdogan's Ankara palace came with 1,400 rooms but it certainly didn't come with a pole for running up a white flag. Global market players saw one raised on May 23. Facing a full-blown currency cri- sis, the central bank finally bit the bullet and announced an emergency rate hike in a desperate effort to halt the plunge of the lira. Analysts are convinced the hike was impossible without Erdogan’s loyal- ists forcing the country’s populist leader into a humiliating climbdown.
The story of the Turkish lira’s collapse in recent months is not for the faint-heart- ed. Despite central bank’s emergency action, the country could still go over the cliff edge and slip into a classic emerging market currency-and-debt crisis.
And on top of the near-economic melt- down, Turks go to the polls in a crucial general election in June that is likely to see Erdogan made an executive presi- dent with even more power.
Pre-election Erdogan seem to stand in the way of a long overdue interest rate increase, before relenting when the inevitable heat from global markets became white-hot. Now analysts are ask- ing whether the country can restore its monetary policy credibility. As an indica- tor of the extent of the damage, Turkey has started paying more to service its debt than even Senegal.
In all, the TRY is down around 20% against the dollar so far this year, and 30% since last September. The Turkish economy is overheating, its double-digit inflation won’t budge, inflation expec- tations are rising and Turkey’s current account deficit, one of the widest in
the world, is surging. Yet on May 15, Erdogan, who even amid this economic mayhem was still pushing the highly
inconventional idea that Turkey needed interest rate cuts, not hikes, during an interview on Bloomberg TV given during a three-day UK visit. It was this inter- view, described by some as “bonkers” that really pulled the rug out from under investors’ confidence.
Interview from hell
“Erdoganomics” prescribes monetary loosening, making a simplistic link between interest rates and the rate of inflation: the lower interest rates are,
0.75%. Of course we are in the UK. In the UK the nominal interest rate is 0.5%, inflation 2.5% and the real interest rate is negative 2%. That means it appears that when the interest rate gets lower, you can see where the real interest rate falls to... There is no need to look left, to look right and to rediscover the world. When there are such open, clear exam- ples, why do we get flung left or right? We need to take our steps accordingly. And our finance sector must balance itself according to this,” Erdogan said
“Turkey has started paying more to service its debt than even Senegal”
the lower inflation is. Most economist see the relationship working the other way round: if inflation rates are high you have to raise interest rates to force infla- tion down. Erdogan was very specific on this point in his interview.
“I would like to make this matter [of interest rates and inflation] open and clear to you. Let me give examples from some countries... In Argentina, the cen- tral bank’s nominal interest rate is 40%, current inflation is 25.6%, but if you look at the real interest rate, it is 14.4%. We look at Russia, the central bank’s nominal interest rate is 7.3%, inflation 2.4%, real interest rate 4.9%. We look at Brazil. The central bank’s nominal interest rate 6.5%. inflation 2.8%, real interest 3.7%. Alongside this we look
at South Africa, in South Africa a 6.5% central bank nominal interest rate, 3.8% inflation, 2.7% real interest rate. Now I come to my own country. 13.5% nominal interest rate, 10.9% inflation, 2.6% real interest rate. Alongside this, the US has 1.75% but on the other hand, infla-
tion 2.5%, real interest rate is negative
in his London interview on May 15. The market sold Turkish assets heavily after it was published.
Defenders of the lira had at least hoped that he would keep schtum on the ques- tion of interest rates. Not only did he offer this little lecture he went on to sug- gest that if he wins the general election he wants to take a bigger roll in setting monetary policy.
Looking ahead to the time after the upcoming June 24 snap elections – when Turkey will become a presidential republic with a near-all-powerful execu- tive president, no prime minister and a neutered parliament – Erdogan told the interviewer that while the Central Bank of the Republic of Turkey (CBRT) would be independent in monetary policy, it would not be able to ignore signals from the new executive presidency.
“I will take the responsibility as the indisputable head of the executive in respect of the steps to be taken and deci- sions on these issues,” Erdogan stated.
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