Mark Bentley
May 15 2018

Investors say ‘enough’ as Erdoğan vows more economic control

Investors in Turkey are saying enough is enough after President Recep Tayyip Erdoğan vowed to increase his control over monetary and economic policy following June 24 presidential and parliamentary elections.

The lira fell to another record low of 4.46 per dollar on Tuesday, taking losses for the year to more than 15 percent. In an interview with Bloomberg, Erdoğan said he, not the central bank, was ultimately responsible for guiding monetary policy.

Erdoğan’s comments to Bloomberg TV sounded like a compendium of alternative theories on how to run an economy, which included his insistence that higher interest rates cause inflation. Erdoğan also cited the United States and Britain – he was in London to meet investors and Prime Minister Theresa May – as “clear examples” of negative real interest rates spurring investment in an economy but also keeping inflation in check.

Erdoğan declared last week that if the nation said “tamam” or “enough” then he would step aside. His political opponents immediately jumped on his comments. A campaign proclaiming TAMAM went viral within minutes, prompting Erdoğan’s supporters to counter with “DEVAM”, or continue.

Tim Ash, a senior strategist at London-based hedge fund Blue Bay Asset Management, described the Bloomberg interview as “Erdoğan unchained” after the president set about trying to convince presenter Guy Johnson that his economic theories were correct.

Johnson pressed Erdoğan on his approach to interest rates, prompting him to list a series of statistics from other countries that, he said, proved a case for lowering rates after the polls.

“There is no need to look left, to look right and to rediscover the world,” he said. “When there are such open, clear examples, why do we get flung left or right?”

He cited a “very serious development” in Argentina, where the government raised interest rates to 14.4 percentage points above inflation to stem its currency’s decline, only to take out a new loan accord with the International Monetary Fund to rescue its economy.

When Johnson asked him if he would play a role in monetary policy going forward, Erdoğan responded:

“Yes! This may make some people uncomfortable. But we have to do it. Because it’s those who rule the state who are accountable to the citizens.”

In a further sign that investor patience with Erdoğan is running very thin, yields on Turkey’s benchmark 10-year bonds surged to as high as 14.5 percent on Tuesday, the highest level on record.

In the absence of central bank rate hikes – the bank has increased interest rates just once this year, and by only 75 basis points to 13.5 percent to defend the lira – the bond market is under increasing stress.

central bank governor Murat Cetinkaya
Central Bank Governor Murat Çetinkaya

Local press reports said foreign investors were starting to lose confidence in investing in Turkish bonds, citing the widening spreads between bid and offer prices. Demand for Turkish lira debt in recent auctions has been tepid at best.

Erdoğan has already set about trying to lower interest rates. Last week, two state-run banks, controlled by his advisers and allies through the Turkish Wealth Fund, slashed interest rates on mortgages to 0.98 percent monthly, meaning they will make losses on the lending as Turkish banks collect deposits at more than 13 percent per annum.

Erdoğan said on Monday that Turkey’s banks would have to “adjust accordingly” to his plans to cut interest rates.

Government policy has contributed directly to higher interest rates and inflation in the country. Erdoğan has provided tens of billions of dollars in loan guarantees to industry, increased pension payments for retirees and provided huge investment incentives, including tax breaks and social security amnesties, for his close business allies.

The inflation rate has accelerated to 10.9 percent, more than three times the average in emerging markets. Erdoğan’s economic stimulus measures, which pushed economic growth to more than 7 percent last year -- the highest rate in the G-20 group of industrialised countries -- have also widened the current account deficit to more than 6 percent of gross domestic product as demand for imports surged.

The International Monetary Fund and ratings agencies are also very concerned about the economic developments in Turkey. In April, Standard & Poor’s cut its foreign currency debt rating one notch to BB-, two steps below investment grade, warning that Erdoğan’s increasing authoritarianism was making economic policy difficult to predict.