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bne April 2021 Cover Story I 29
Is there anyone left on the planet who to aggressively tighten it to fight high have been enough to get ahead of the
inflation despite the pain this would cause to the Turkish consumer. But by March 22, the Turkish regulator’s credibility lay smashed to smithereens and the lira began to tank.
Agbal was replaced by Sahap Kavcio- glu, a former member of parliament for Erdogan’s ruling Justice and Develop- ment Party (AKP), and like the populist president, a critic of high interest rates. In short, Kavcioglu is seen as another “yes man” that can cut rates but won’t be allowed to raise them.
Since the carnage brought about by Erdogan's refusal to stick with Agbal, the Turkish economy has, perhaps surprisingly, not crashed, but a deep depreciation looms and at a certain point there will be real anxiety that it could take out the banking sector. It can't be emphasised enough that this
hasn’t commented on Turkey’s eco-
nomic tumult? Investors and traders dealing with the Turkish markets were clearly in a state of stunned incompre- hension as the trading week got under way on March 22. Three days earlier, very late on Friday night on March 19, President Recep Tayyip Erdogan had taken the shocking step of firing a third central bank governor by decree within two years.
Naci Agbal had only been on the job for four months, but in that time he had turned the Turkish lira from the worst performing currency in the world into the best performing. In all, he hiked rates by 875 basis points. The final instalment of that, a 200 bp rate hike, was brought in on the afternoon of March 18. Less than 48 hours later he was gone.
Agbal had won market plaudits by aggressively raising the policy rate, taking it to 19%, the highest level of any big economy. The 200 bp hike was portrayed as a “front-loaded” move to head off inflationary pressure, officially near 16%, also one of the highest levels of any big economy, and a reaction to rapidly rising US bond yields that some are calling a repeat of the 2013 “taper tantrum.” The lira gained 18% during his four months on the job, making him the first head of Turkey's central bank to preside over a surging lira since
the 2008 financial crisis. Investors had started to dare to hope that this time in Turkey, things were going
to be different.
After years of “Erdoganomics”, in which the president bizarrely believes that hiking interest rates increases inflation (the rest of the world believes the opposite happens), investors finally thought someone that knew what
they are talking about was in charge of the central bank. The idea was that Erdogan, alarmed at how Turkey last autumn found itself on the edge of
a precipice threatening the country's second balance of payments crisis in just over two years, would this time leave monetary policy well alone and stick with a governor who saw the need
recent rise in US rates. But like many central bank governors in the region, Agbal was concerned about the pos- sibility of a new taper tantrum and so front-loaded his rate hike to head off problems later.
The National Bank of Ukraine (NBU) was the first to end several years of easing in February with a 50bp hike and Central Bank of Russia (CBR) governor Elvira Nabiullina surprised markets
at the start of March, reversing two years of easing with a 25bp hike and the promise of more to come. (Nabiul- lina signalled the change in direction by wearing a hawk brooch to a press conference on the rate move.)
It's a dilemma all governors in the region are facing: do they hike early and by
a lot to deal with rising US bond yields and mounting inflationary pressures at
“Three fired central bankers in such a short period is a fired central banker too far”
time the central bank’s credibility is
in shreds. Three fired central bankers in such a short period is a fired cen- tral banker too far. Analysts trying to chart the likely course of the lira in the months ahead are simply resorting to guesswork to fill in the column blanks.
Initial anxieties that there was a risk
of fast contagion spreading from the undermined Turkish economy to other markets amounted to short-lived fears but that just underlined how Turkey, during Erdogan’s 18 years at the wheel, has always been a slow-motion car crash that markets legitimately fear could veer across the road. The real Turkey watch- ers, meanwhile, are aware that this is just the beginning of the end for the country, not the end in itself.
Rearguard action
It seems that Agbal suspected his days were numbered but hiked rates anyway. Analysts said that the 200bp hike was unnecessary, as 100bp probably would
a time when most of their economies are still struggling to recover from the annus horribilis of 2020?
Agbal took the plunge, fairly certain that Erdogan would not approve, but perhaps hoping he would grin and bear it. According to local reports, Agbal had already been cut off from the president for several weeks prior to his big, and final, hike, as the local Erdogan press began to openly criticise him as he changed central bank personnel during his first 100 days on the job. Investors ignored these signs, dismissing them
as “noise.”
Erdogan took to the airwaves as the first trading week following the firing of Agbal got under way. In a somewhat fanciful rearguard action, he called on Turks to sell their hoards of gold and foreign exchange to help shore up the country's evaporating fiscal resources. Everyone ignored him. The Turks did not even buy into the lira story when
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