In the latest distress signal from one of the most troubled corners of the emerging markets, this morning the Turkish Lira plunged to fresh all time lows against the dollar after Turkish President Recep Tayyip Erdogan said he intends to tighten his grip on the economy and will take more responsibility for monetary policy if he wins an election next month, which he will.
In an interview with Bloomberg, Erdogan brushed aside the apparent collapse of his economy in a stagflationary vortex, where double digit inflation is racing with daily TRY devaluation, and said that after the vote transforms Turkey into a full presidential system, he expects the central bank will have to heed his calls for lower interest rates... which is bizarre as the last thing investors in Turkey want right now is lower rates. For context, the central bank’s key rate is now 13.5%, compared with 10.9 percent consumer-price inflation.
"When the people fall into difficulties because of monetary policies, who are they going to hold accountable?" the cartoonish president told Bloomberg. "They’ll hold the president accountable. Since they’ll ask the president about it, we have to give off the image of a president who’s influential on monetary policies."
In other words, in addition to having recently been granted quasi-despotic, "emergency" powers, Erdogan now wants to also take over the central bank.
Erdogan has routinely criticized the central bank for setting interest rates that he says have helped stoke rising prices, an argument that contradicts conventional economic theory. Central bank governor Murat Cetinkaya has said higher borrowing costs would help anchor the currency, a view in line with orthodoxy.
Bizarrely, expounding on his own unique brand of macroeconomics, Erdogan said that cutting rates would bring lower inflation because borrowing costs would decline.
“Of course our central bank is independent,” Erdogan said. “But the central bank can’t take this independence and set aside the signals given by the president, who’s the head of the executive. It will make its evaluations according to this, take its steps according to this. And I believe this will result in very beneficial steps in the future."
Someone should perhaps explain to Erdogan just what "independent" means.
Immediately after Erdogan's comments hit the tape, the lira slid to its weakest level ever against the dollar, losing 0.6% to 4.3942 at 7:32 a.m. Istanbul time, before retracting modestly then blowing out again
Last month Erdogan called snap sham elections for June 24, in which a victory (which is guaranteed) would consolidate his one-man rule of a country he’s governed since 2003. A 2017 referendum saw the role of parliament weakened drastically and gave the president sweeping authority in the most radical constitutional overhaul since the republic was founded 95 years ago; next month's election will seal Erdogan's full conversion to despot.
“From the moment we move to a presidential governing system, our effectiveness there will be very different,” he said. “We’re going to do this so we can be held accountable for the responsibility we’ve taken.”
* * *
Erdogan is visiting London, where he is meeting with executives, bankers and investors even as a financial and economic crisis in Turkey grows. Erdogan will also meet U.K. Prime Minister Theresa May and Queen Elizabeth II later on Tuesday.
The outreach comes as Turkey’s relations with its NATO allies fray and its diplomatic focus shifts toward Russia and Iran. The country faces the unprecedented risk of sanctions from the U.S., a risk that Erdogan downplayed.
Asked if he was prepared for U.S. sanctions should he consummate the purchase of a missile defense system from Vladimir Putin’s government, Erdogan responded that he "can’t cut off our ties with Russia" adding that “If we’re allies with the U.S., we need solidarity, not sanctions."
Meanwhile, the apparent collapse of the Turkish economy has shaken investor confidence, which is critical because Turkey’s current-account deficit demands steady inflows from abroad. The Q1 shortfall reported on Monday was more than $16 billion, almost double the same period last year.
* * *
Commenting on the interview, Ziad Daoud, chief Middle East economist for Bloomberg Economics said that sentiment has been the main reason behind the decline of the lira this year, and Mr Erdogan’s comments won’t improve that.
"Investors have been concerned about government intervention in monetary policy, which is compromising the independence of the central bank. The President’s latest remarks will indeed make some uncomfortable – unfortunately, unnerving investors is the last thing he needs to do if he wants to stabilize the lira."
Full interview below.