In the nearly six months since summer elections saw AKP lose its absolute parliamentary majority [8] in Turkey after a strong showing at the ballot box by the pro-Kurdish HDP, it’s been interesting to watch how the central bank has reacted (or, more appropriately, “not” reacted) to periods of weakness in the lira.
[9]
Back in August, when things were falling apart in earnest, the cental bank attempted to explain [10] how Turkey planned to deal with the normalization of DM monetary policy by releasing a "road map." No one was impressed as the "plan" was decidedly short on specifics. As Citi noted at the time, "the so-called road map lacks a well-defined timetable and analytical discussion."
Ultimately, Ankara decided to just lay it out there when, on August 19, the central bank said it would not be hiking rates [11] until the Fed liftoff. "Now that the CBT has left rates unchanged and announced that it will largely rely on selling more FX to tame volatility in FX market while waiting Fed to hike first, TRY still remains a fair game," BofAML said, adding that "CBT has announced its long-awaited road-map for the normalisation of the monetary policy and we believe it’s likely to disappoint the markets because it's too gradual."
Yes, "too gradual" which is why we said the following just two weeks ago:
One important thing to note about this particular situation, is that Turkey has been reluctant to hike in order to arrest the lira's decline. In fact, the central bank has on any number of occasions explicitly stated that it will follow the Fed. But when, back in August, Turkey attempted to release a "roadmap" of how its central bank intended to respond to policy normalization by DM central banks, the market wasn't buying it, suggesting that if the Fed hikes, it may not be as simple as simpy saying "oh, ok, we'll hike too." That is, they may find themselves unable to catch up, portending still more lira weakness."
Now that Turkey is apparently trying to start a global conflict by becoming the first NATO member to shoot down a Russian jet since the Cold War, you can expect further lira weakness. Of course we predicted that too. From earlier this month [12]:
And for anyone who thinks that a "strong" AKP government is going to give the lira anything that even approximates lasting relief, or that further ECB easing will give the central scope to remain on hold (or even to cut) in the face of a Fed hike, we suggest you take a hard look at exactly what's going on politically and militarily both within Turkey and on its borders. There are huge (and likely intractable) idiosyncratic risk factors here that could send the currency plunging at any time.
We went on to list one more factor that could weigh on the lira: autocratic incompetence. By that we of course mean President Tayyip Erdogan's contention that the lira and the country's FX reserves be damned, rates need to be lower. Here's what Erodgan said a few weekends ago at the G20 summit in Antalya:
"In Turkey, the interest rates are high. Our rates are not those in the West, where they are low. First you have to reduce the cost of money. As long as the cost of money is on the rise, you can neither find young businessmen nor young businesswomen."
As Reuters noted at the time [13], "Erdogan has repeatedly called for lower rates to spur growth, equating higher financing costs with treason." The G20 speech - where central bank governor Erdem Basci was forced to watch as Erdogan the rates strategist lectured everyone, including Christine Lagarde, on monetary policy - "is likely to unnerve investors already worried about central bank independence," Reuters continued.
Indeed, and on Thursday we learn that those worries were not unfounded. Earlier today, we got a look at Turkey's new government program (Ankara announced the new cabinet earlier this week) and conspicuously missing was the word "independent" in reference to how the central bank chooses monetary policy. As Bloomberg reported earlier, it was the first time the word was ommitted since AKP came to power thirteen years ago. Spot the moment when the market noticed:
More, from Bloomberg [14]:
The new program says “it will continue to be fundamental that the central bank directly determine by itself the monetary policy tools it will utilize to attain price stability.” The last program, from September 2014, said the central bank “will continue to determine monetary policy and the monetary policy tools it will use to attain price stability in an independent fashion.”
Turkey’s recently appointed Deputy Prime Minister Mehmet Simsek, the $800 billion economy’s foremost chief, said “speculation over wording on central bank independence in the new government program doesn’t reflect the truth.”
Bora Tamer Yilmaz, an economist at Ziraat Yatirim in Istanbul, said the market “is trying to read too much into this.”
“We should focus on the meaning rather than individual words,” Yilmaz said by e-mail today. “Turkey has improved itself during the last decade in establishing modern institutions, and we are not expecting that process to unwind.”
Yes, we should "focus on the meaning and not the words." Sorry Tamer, but it means exactly what everyone who knows anything about this government thinks it means: Erdogan will conduct monetary policy from now on.
So here's a guy who in just the past six months has, i) started a civil war in order to whip the public into an anti-Kurd hysteria, ii) sabotaged the coalition building process so he could call for new elections, iii) arrested numerous members of the press, iv) held a farce of an election where his party only put up a strong showing because voters were scared to death, v) shot down a Russian warplane under suspicious circumstances, and now vi) eliminated the idea of central bank independence. And we haven't even gotten to the part where he moves to change the constitution on the way to establishing a powerful executive presidency.
Meanwhile, the government in Ankara has been variously accused of facilitating black market crude sales for ISIS even as Erdogan uses the group as a smokescreen for his crackdown on political rivals.
Put simply: the idea that this country under the current government is a NATO member is absurd and the notion that Washington would support this type of autocratic rule is a testament to the fact that the US only cares about the proliferation of "democracy" if it means securing a foothold in a country that's not already a strategic ally (like Syria).
