Erdogan blamed for collapse of Turkish Lira  

13:51 • 15.06.18



Re-published from the Economist


When Turkey’s President Recep Tayyip Erdogan urged his supporters in December 2016 to defend their currency, the lira, by selling their dollars, euros and gold, scores of them answered the call. In Konya, a city in Turkey’s conservative heartland and a reservoir of votes for Mr Erdogan and his Justice and Development (AK) party, some locals outdid themselves. A district mayor gave a week off to municipal workers who sold more than $500, a carpet dealer handed out free rugs to customers who exchanged more than $2,000, and a surgeon offered free horse rides to anyone who showed up with a receipt from a currency-exchange office. Similar campaigns sprouted up elsewhere. Within a week, people across the country had converted more than $440m to liras.


They may now regret it. In dollar terms, those who followed Mr Erdogan’s advice 18 months ago have lost a quarter of their cash. But the collapse of the lira, which has lost a third of its value against the dollar since the start of emergency rule in July 2016, pushing inflation into double digits, has spared few people in Turkey. Ordinary folk have seen their spending power collapse. Turkish companies groan under the weight of foreign debt amounting to some $300bn, more than a third of GDP. According to Bloomberg, some of the country’s biggest corporate borrowers are trying to restructure loans totalling almost $20bn. Citing a decline in investor confidence, Moody’s, a ratings agency, recently downgraded the ratings of 17 Turkish banks.


Mr Erdogan bears much of the blame. Over the past few years he has favoured cheap credit and high growth over inflation. In May, after he announced he would exercise more control over the central bank in the years to come and proclaimed, bizarrely, that high interest rates cause inflation, the lira went into free fall. It recovered only after he allowed the bank to make two big rate increases, of 300 and 125 basis points, in two weeks.


The problem with Turkey’s economy goes well beyond bank rates. “One fundamental question is the loss of confidence in the functioning of the economic system and monetary policy,” says Seyfettin Gursel, the head of Betam, a think-tank. The other is what may be in store for Turkey’s stability and its reeling democracy after snap presidential and parliamentary elections on June 24th. Outside investors have already been spooked by constitutional changes that will give the president huge new powers after the vote, abolishing the post of prime minister, politicising the judiciary and curbing parliamentary oversight. Rumours that Mr Erdogan might call another election if voters entrust him with the presidency but hand control of the parliament to the opposition have rattled nerves further. Pollsters expect Mr Erdogan to keep his job, but predict a much tighter race in the parliamentary contest.


As always, ministers have promised reforms, a return to central-bank independence and fiscal discipline as soon as the elections are over. But with the exception of the recent rate increases, the signals from Ankara have hardly been reassuring. In the past two months Mr Erdogan’s government has gone on a spending spree to woo voters, offering cash bonuses of over $400 per year to each of the country’s 12m pensioners, tax breaks for new property-buyers and an amnesty for money, gold and other assets brought in from abroad. The president is once again blaming foreign countries for the decline of the lira and exhorting Turks to get rid of their hard currency. “My brothers who have dollars or euros under your pillows, go and change your money to lira,” he said at a recent rally. “We will spoil this plot together.”


On paper, the economy has been booming. In the first quarter, according to data released this week, GDP grew by 7.4% year on year, the same pace as in the whole of 2017. But the government-induced credit binge that has yielded such juicy numbers over the past couple of years is giving way to a hangover. The current-account deficit has widened to $5.4bn in April (over 6% of GDP when annualised), up from $3.7bn a year earlier, increasing Turkey’s reliance on volatile portfolio inflows. Foreign direct investment has steadily decreased since 2015. With credit running dry and companies sitting on a mountain of debt, a sharp slowdown is inevitable, says Zumrut Imamoglu, chief economist at TUSIAD, a business lobby.






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