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bne June 2018 Cover story I 29
the player. The people have seen the puppet and puppeteers. They will not allow them or give an opportunity,” Deputy Prime Minister Bekir Bozdag was quoted as saying.
Ash said in a note: “Brutal truth is we now know [the lira] is a floating cur- rency. Turkey never had enough reserves to defend the exchange rate. Erdogan made a choice between letting the cur- rency go and/or hiking rates and for his particular political calculation he opted to let the currency go.
“The currency adjustment will help rebalance the current account deficit but it will crimp growth [ahead of the June 24 early elections]. Not sure Erdogan gets that and this will also slash import demand. But the FX hit to domestic confidence and growth will be significant.”
Ash also observed that investors in Turkey “need plain vanilla central banking and not some big Erdoganite economic experiment based on little/ weak economic foundations”. “[Erdo- gan has] argued against classic interest
rate theory that when faced by rising inflation, rates need to be increased. He argued that high interest rates cause inflation. Now maybe in stagflating DM economies there might be some logic
to go against orthodoxy, but certainly not in Emerging Markets. And surely at times like this with the lira under the cosh, with a large current account defi- cit and external financing requirement/ gap, now is certainly not the time for experimentation.”
Not exactly a mea culpa
For his part, in the immediate wake of the emergency hike Erdogan was not exactly issuing a mea culpa, but he did at least state in a televised speech to former lawmakers in Ankara that “in the new government system, we’ll continue to abide by the global governance prin- ciples on monetary policy.” Head of the government’s economic team Mehmet Simsek – the deputy PM and former Wall Street banker sometimes referred to as the last “market friendly” member of the Cabinet – was at the same time doing the media rounds telling inves- tors Turkey would not stand obstinate against the markets, but Erdogan had,
wiser heads will have noted, already qualified his own remarks by warning that he would not let “global governance types” ruin the country. Who’s to really say what road an Erdogan, re-elected with almost unchallengeable sweeping powers, will really take.
Crucial to Turkey’s economic plight will be whether the Turks stay loyal to the lira. On May 26, atop his populist bandwagon, Erdogan urged a crowd at an election rally in the eastern city of Erzurum:
“My brothers who have dollars or euros under their pillow. Go and convert your money into lira. We will thwart this game together.” Alas, the latest figures on whether Turkey’s households are sticking with the lira are not particularly encour- aging for any plans the president still
has to micromanage the economy. At the start of 2017, the share of bank deposits held in foreign currencies by Turks stood at around 36%. By last week, the figure had climbed to near 43%. With such jitters on show, even the election bribes the government has been handing out to voters may not be enough to forestall a bet on the opposition as the best chance of avoiding an economic hell.
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