Fortune: Turkey’s currency plummeted after Erdogan defied critics and doubled down on his mania for low interest rates
dollarization/currency mis-matches/inflation.” Meanwhile, Legal & General Investment Management’s emerging market debt chief, Uday Patnaik, told the Financial Times the fall was “the inevitable consequence of Erdogan’s war on rates.”
“We are seeing a perverse economic experiment of what happens when a central bank has effectively no monetary policy,” Bluebay Asset Management strategist Tim Ash said in a note reported by CNBC.
A weak currency isn’t always bad news for an economy. Countries often welcome a weaker currency as an engine to stimulate exports and boost competitivity. But should rates fall too far, it could scare off foreign investors. Such an occurrence could depress growth in the long run, effectively dashing any short-term benefit from cheaper local currency.
Robin Brooks, the Institute of International Finance’s chief economist, tweeted that what happened Tuesday was comparable to the lira’s August 2018 crash—an episode that was also fundamentally down to Erdogan’s low-rate fetish, although then-U.S. President Donald Trump’s doubling of metals tariffs on Turkey also played a major role.
“The lira recovered substantially after 2018 and that template holds now as well,” Brooks wrote. “In the end, Turkey is a current account deficit country and has to capitulate to markets.”
CNBC: Turkish lira crashes to ‘insane’ historic low after President Erdogan sparks sell-off
Semih Tumen, a former central bank deputy governor who Erdogan dismissed in October, sharply criticized the president’s moves.
“We need to abandon this irrational experiment, which has no chance of success, and return to quality policies that will protect the value of the Turkish lira and protect the welfare of the Turkish people,” Tumen wrote on Twitter, according to a translation.
Ahval News: Turkish lira’s losses force businesses to reject local currency contracts
High currency volatility meant that wholesalers and raw materials producers were unable to set prices, meaning contracts had become very difficult to make, said Şeref Fayat, president of the Union of Chambers and Commodity Exchanges of Turkey (TOBB) Ready-to-Wear and Apparel Sector Assembly.
Sellers are becoming concerned that they will not be able to replace goods purchased by customers and that they will have to buy goods at a higher price than they can sell them, Fayat said, according to Dünya. Contracts for the payment of orders for the domestic market are normally made over as many as six months, but now two months or even two days has become intolerable, he said.
Financial Times: Turkish lira falls as Erdogan vows victory in ‘economic war’
It’s like a horror film,” said Enver Erkan, an analyst at the Istanbul-based Terra Investment, adding that it was hard to say how much further the currency would plunge given that policymakers appeared willing to simply let it fall.
“This is the inevitable consequence of Erdogan’s war on rates,” said Uday Patnaik, head of emerging market debt at Legal & General Investment Management. “The thing that would stop the freefall is some sign of an independent central bank in Turkey. But there’s not much prospect of that. Erdogan’s the type of guy who likes to keep doubling down.”
Bloomberg: Erdogan Rate Cut Mantra Fuels Worst Lira Streak in 20 Years
The latest selloff came after Erdogan defended his demands for lower borrowing costs that have driven up prices and frustrated investors. They complain monetary policy is becoming increasingly irrational and unpredictable in a country where the president’s influence runs deep. While most central banks are talking of tightening policy as the global recovery fuels inflation, Turkey has slashed 4 percentage points off borrowing rates since September.
“For investors, Erdogan’s comments mean one thing: There will be no one there for them when inflation continues to take a toll on their assets,” said Ima Sammani, an FX market analyst at Monex Europe. “Erdogan’s comments can largely be seen as abandonment of caution and a sign to markets that the easing cycle is unlikely to end anytime soon.”
“It’s as if they put a child in charge of a nuclear power plant,” said Kerim Rota, head of economic policy at opposition Future Party, criticizing Erdogan’s economic policies. Speaking on opposition Halk TV, Rota, a former banker, said millions of Turks who earn liras will lose with this policy.
To be continued….
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