Photographer: Nicole Tung / Bloomberg
Photographer: Nicole Tung / Bloomberg
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With President Recep Tayyip Erdogan sacked by his third central bank governor in less than two years, Turkey’s top political leader in the last century has reaffirmed his conviction to fight the norms of modern economics.
Markets are again unchallenged.
Investor flights dropped the lira by as much as 15% on Monday, adding to losses that have held inflation in double numbers for the past 16 months. Yields on 10-year lira bonds rose by a record high and were the lowest stock since 2013.
“This is a sudden halt in capital flows,” similar to a 2018 cash meltdown, said Robin Brooks, chief economist at the International Finance Institute in Washington. “The return then was a deep recession due to a tighter financial situation. It will be the same now. “
Erdogan’s decision to fire Naci Agbal as the bank’s governor came early in the wee hours of Saturday morning after a staggering 200 basis points interest rate increase last week moved the benchmark rate to 19%. In his four months in office, Agbal had built the benchmark with a cumulative base of 875 – a stark contrast to the president’s points a strange belief that higher borrowing costs fuel inflation. His moves helped stabilize the money and attract investment.
Behind you Erdogan’s Strange ideas about interest rates: QuickTake
What Stake has
While Turkey’s president watched a year of strong growth and a steady lira as far as last Thursday, what he did over the weekend has made Turkey harder to sell to foreigners. foreign investment. They are crucial in helping fund the country’s current account deficit, which exceeded $ 36 billion in 2020.
The sudden move of the central bank to the wrong lira bulls that led to belief in Erdogan’s apparent transition to mainstream economic policies in November, when he introduced Agbal and apparently it connects to economic options that would require spiraling prices that were eating into its popularity.
Erdogan has not addressed the issue since announcing a new head of monetary policy, Sahap Kavcioglu, a professor of economics at the University of Marmara. Kavcioglu has occasionally written in support of Erdogan ‘s neutral views on interest rates in his column in the out – of – government Yeni Safak newspaper.
The post feared a reversal of monetary policies in the past two years, pushing the lira 7.5% lower to 7.8016 per dollar on Monday’s closure in Istanbul. The frontier currency suffered losses from as low as 8.35, with both state and private banks selling dollars from local investors, who saw the weak lira as an opportunity to make a profit on dollar holdings, according to traders who knew the streams.
State lenders did not appear to protect a specific lira rate as they did for much of the last two years when they selling Turkish foreign FX reserves, the traders said, wanting not to be identified, according to the rules of their companies.
Market backing
Yield on 10-year Turkish lira bonds rose 21 basis points to 19.1% at 10:46 am on Tuesday after jumping 484 basis points the previous day, the highest number in the 11 years since Turkey began selling of these securities. Stocks fell 7%, forcing round-breakers to stop trading twice at Borsa Istanbul within the first hour of trading.
The cost of borrowing local currency for one week rose as high as 2,067% on Monday as traders scrambled to get their hands on lira liquidity needed to release their long stakes.
The approach under Finance Minister Berat Albayrak, Erdogan’s son-in-law who retired in November, was to use foreign resources to promote the lira. Goldman Sachs believed a policy was costing Turkey more than $ 100 billion in lost assets – leaving very little weapons to protect the currency now.
“We will never turn on the lira as long as Erdogan effectively runs the central bank,” Norreas Steno Larsen, money and rate strategist at Nordea Bank, said on Twitter.
Turkey’s total reserves, including gold and reserves held by the central bank on behalf of commercial lenders, fell 20% last year until Agbal’s investment to $ 85.2 billion, while and net foreign exchange reserves fell more than half to $ 19.6 billion.
Foreign Currency
Turkish growth is closely linked to portfolio inflows as strong domestic demand – traditionally a key driver of activity – usually leads to a widespread deficit in the country’s current account balance.
Weakening inflows and interim blows of currency weakness led to boom-and-bust cycles that saw total domestic product fall below less than $ 800 billion for much of the last decade. While Erdogan held the majority of elections in that period, his sanction rate failed to recover from the 46% rate seen in 2019, according to a February study by the MetroPOLL-based voter in Ankara. That’s when he suffered the strongest election ever, losing the mayor of Istanbul to the front.
“Not many are surprised that Erdogan is catching on from the jaws of victory. But it is so quick to marvel even by its standards, ”Renaissance Chief Capital Economist Charles Robertson wrote in a note to delegates. “In the long run, Erdogan may have lost himself in the 2023 election – but by then Turkey could be a termination market or an emerging market.”
(Updating market paragraphs. An earlier version corrected the spelling of the last name of the controller.)