TURKEY:  How ever-changing economic plans con small investors?

After months of steady depreciation, a massive fluctuation in the Turkish lira within a week resulted in a lot of money changing hands.


In the week before last, when the lira had already slid to about 13.5 to the US dollar, President Recep Tayyip Erdoğan reiterated his inflation-interest rate theory every other day, which led the lira to plunge further to 18.45 to the dollar on Monday.


But when the president on that night unveiled a new system in which the Treasury compensates lira depositors for foreign currency fluctuations, the lira’s rapid recovery began. By the end of Friday, the currency had gained 44 percent in value.


“Backdoor sales”

Not only the new tool itself but also the Central Bank’s “backdoor interventions” amounting to about 7 billion dollars apparently boosted the lira’s appreciation, according to calculations based on the bank’s daily balance sheet.


In “back-door” sales,  Central Bank does not directly intervene by selling hard currencies, but pumps foreign currency into the market through state-owned banks. The opposition had earlier in the year  accused the government of wasting 128 billion dollars using this method over the past couple of years.


During a live interview on NTV on Thursday, Minister of Finance and Treasury Nureddin Nebati implicitly admitted “backdoor sales,” saying that “Turkey uses all instruments it needs.”


Moreover, despite being the primary goal of the new tool, the amount of foreign currency deposits have hardly changed since Monday, according to the Banking Regulatory and Supervision Agency (BDDK).


Small investors

All in all, it was small investors who paid the price for a week of massive fluctuations, as Minister Nebati admitted.


“It wasn’t the major financiers who bought dollars for 15, 16 or 17 liras. They knew things would turn around somehow,” he told NTV on Thursday. “But who was conned? The small investors… They’re brooding over it now.”


He blamed the opposition for encouraging people to convert their savings into hard currencies despite an “artificial” depreciation of the lira as “there was no problem in macroeconomic indicators.”


“It was a trap”

According to the opposition, however, what happened on December 20 night was a fraud to enrich government cronies.


At a press conference yesterday, CHP Spokesperson Faik Öztrak said, the public was “trapped” while those who get inside information made a lot of money.


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“What was the reason for the sudden decrease in exchange rates while the people hadn’t even understood what the foreign currency-indexed deposits announced by Erdoğan was?” he questioned.


“It is against the natural flow of life for real persons to sell foreign currency in such a large amount at midnight … Indeed, it was understood after the Central Bank’s daily analytic balance sheet was announced that there was a planned foreign exchange selling operation carried out by the state,” Öztrak remarked.


“The Central Bank has been robbed. Those who knew of the operation have made a lot of money. The rest have lost their money and assets,” main opposition Republican People’s Party (CHP) deputy Deniz Yavuzyılmaz said on Twitter yesterday.


Implications in politics

The political aspect of Erdoğan’s move is what really matters, according to some observers, both pro-government and otherwise.


The government and its favored media outlets portrayed the lira’s rapid recovery as a victory in what they call “the economic war of independence.”


“We achieved financial stability in three days with our president’s manifesto,” Nebati said in Thursday’s interview with NTV. He asserted that the government proved those who were calling for an interest rate hike wrong by increasing the value of the lira “by our own means.”


Hasan Basri Yalçın, a columnist for pro-government daily Sabah, wrote that Monday night’s events shattered the opposition’s last hopes that economic pressures would topple Erdoğan.


“They hadn’t been able to topple Erdoğan … but they had believed so much that he would be defeated by the markets. This didn’t happen, either,” he wrote.


Yusuf Kaplan, a columnist for daily Yeni Şafak, wrote that Erdoğan, with his “manifesto” on Monday night, foiled an “economic coup attempt.” But the government should be prepared for what’s next, according to Kaplan.


Snap elections ahead?

According to some others, Erdoğan’s move might be a sign of early elections. Over the past few months, the president has firmly dismissed the opposition’s calls for snap elections.


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In an article for bianet, economist Bülent Danışoğlu wrote that the government could not afford to compensate for the difference between interest rates and the change in foreign exchange rates for too long, hence the possibility of an election in the fall increased very much.


There are three ways the state can compensate for the difference, namely increasing taxes, borrowing money and printing money, all of which would have high costs for the government, he argued.


“It’s like being caught between a rock and a hard place … It is clear that the government cannot spend another winter with these policies … The possibility of an election in the fall has increased very much,” wrote Danışoğlu.


İbrahim Kahveci, the head of Karar newspaper’s economy desk, is of the same opinion.


“We gave foreign exchange indexed-deposit guarantees and the exchange rates dropped. But the interest rates, which we really aimed to decrease, did not decrease,” he wrote.


“A budget deficit risk awaits us. Or let’s call it an inflation risk … How can we move further with foreign exchange pressure and a budget deficit? This question leads us to elections … This policy choice cannot bring our country until the end of 2022.”


Mehmet Ali Kulat, the head of the MAK polling company, said the primary function of the “well prepared” foreign exchange move was to create a success story for President Erdoğan.


“The most distinct characteristic of Mr. President is that he competes in every election with a story of success,” he told KRT TV.


“Looking at all social media posts and comments by journalists close to the government, I think that Mr. President is preparing to present himself to the public with a new success story where he won a victory against in the economy againt foreign powers, whose intervention had spiked the dollar.”


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Published By: Atilla Yeşilada

GlobalSource Partners’ Turkey Country Analyst Atilla Yesilada is the country’s leading political analyst and commentator. He is known throughout the finance and political science world for his thorough and outspoken coverage of Turkey’s political and financial developments. In addition to his extensive writing schedule, he is often called upon to provide his political expertise on major radio and television channels. Based in Istanbul, Atilla is co-founder of the information platform Istanbul Analytics and is one of GlobalSource’s local partners in Turkey. In addition to his consulting work and speaking engagements throughout the US, Europe and the Middle East, he writes regular columns for Turkey’s leading financial websites VATAN and www.paraanaliz.com and has contributed to the financial daily Referans and the liberal daily Radikal.