It’s Erdogan Against the Markets After JPMorgan Watershed
As a recession settles over Turkey following a currency crash and a selloff in local markets, the stakes are getting higher.
(Bloomberg) -- The last time Turks went to the polls, the country’s paramount leader for the past 16 years vowed to tighten his grip on the economy. With another national campaign — this time for municipal offices — nearing its climax, he’s rolling out the same playbook.
In the past eight months, President Recep Tayyip Erdogan’s government has imposed price controls, forced lenders to keep credit flowing and banned the use of dollars in most contracts. Most recently, he trained his invective on a familiar target: foreign bankers, with the promise of an investigation into New York-based JPMorgan Chase & Co. for predicting a decline in the lira.
“These are all measures that conflict with the very notion of a market economy,” said Cristian Maggio, the head of emerging-market research at TD Securities in London. “The government is intervening too much.”
As a recession settles in over Turkey following a currency crash last summer and a selloff in local markets, the stakes are getting higher. Turkey relied on foreign capital to finance its credit-fueled growth in 2016-2017, a period when portfolio inflows averaged $1.3 billion a month and the current account sank deeper into deficit. Investors fled Turkish assets last year, and outflows continued for eight months straight before stabilizing.
This week, Turkey further roiled markets by preventing foreign banks from accessing the liras they need to close out their swap positions. That’s made it almost impossible for bankers to short the lira or exit carry trades, and forced the overnight lira rate up to about 1,000 percent from 23 percent.
Some foreign banks were unable to meet their obligations at the close of trading on Tuesday, forcing the central bank to extend hours for transferring funds in Turkey to 9 p.m., according to a senior Turkish official, who spoke on condition of anonymity. On Wednesday, the Turkish stock and bond markets took the brunt of the hit from the measures meant to protect the lira: banking stocks were down more than 7 percent and the yield on 10-year lira bonds rose 74 basis points to 18.23 percent.
Erdogan’s gamble will backfire if investors turn on Turkey and the economy’s problems are left to fester. But with the election clock ticking away before a municipal ballot this Sunday, industries including retail, banking and pharmaceuticals are having to bend to the government’s wishes.
Once hailed as a champion of privatization and an ardent supporter of free markets, Erdogan has loosened up on pressure on the central bank since his vow to take control of monetary policy helped send the lira into meltdown last summer. Asked about government measures to counter the market rout at the time, he’s said that “we have never given up on a free market economy and we will never do so.”
But the rhetoric has started to heat up again in recent weeks, with Erdogan bashing those blamed for gouging food prices as traitors and terrorists, and threatening that bankers will “pay a heavy price” after the ballot for feeding the currency frenzy.
“The question is whether Erdogan will be able to restrain himself after the elections,” said Fadi Hakura, Chatham House’s Turkey analyst. “Turkey needs to adopt long-term measures that require patience and Erdogan doesn’t have that patience. If he loses major cities in the elections, a more interventionist burst of economic growth measures may come, such as pumping credit to the economy.”
The government has already leaned on banks to restart lending, pressuring them to extend cheap credit to industries spanning agriculture and sports and help consumers pay off their debt or get below-market interest rates. The state banks in particular are lending at losses to keep the housing market afloat. The average rate on a mortgage in Turkey has plunged from about 30 percent in October to 17 percent in March. Commercial banks borrow from the central bank at 24 percent.
But the effort paid off with the first expansion in lending since last August, an increase again driven largely by the state banks. Private lenders were more cautious as they balked at extending credit while dealing with billions of dollars in debt-restructuring requests from businesses and a growing pile of bad loans.
It’s not Erdogan’s hostility to free markets that’s to blame for Turkey’s current predicament, according to Refet Gurkaynak, a professor of economics at Bilkent University in Ankara. But the government’s interventionalist turn will make things worse. “Faulty price controls” and a failure to clean up balance sheets will only delay the reckoning and create bigger challenges down the road, he said.
“Bad economic policies have such bad results,” Gurkaynak added. “And they respond to these bad results with even worse policies.”
Erdogan’s falling out with markets reached a low point last week when Turkey’s currency found itself back in the firing line, losing as much as 6.9 percent of its value against the dollar in a matter of hours. Separate investigations against JPMorgan and other unspecified banks were initiated, taking aim at what Turkish regulators said was their role in the lira’s biggest plunge since last year’s crash.
Commentators on Turkish markets were already cautiously censoring their work on Turkey for fear of an investigation or public shaming, like the one that lost an analyst at Ak Yatirim, a unit of one of Turkey’s largest private banks, his job in the wake of a 2016 coup attempt. Investment banks that predict rough times ahead for the Turkish economy, or that call for interest-rate hikes to address the problems, find themselves featured in pro-government newspapers and TV programs being labeled as hostile forces.
Earlier this year the chief executive officer of HSBC Holdings Plc’s local unit was charged with insulting the president, a crime in Turkey. But while Turkey has already turned the screws on analysts and executives at home, the targeting of JPMorgan risks the worst confrontation with a global bank in the Erdogan era.
Read more on the Bloomberg Terminal: Some Foreign Banks Unable to Close Turkish Lira Swaps
Even taking the electoral calculus into consideration, by lashing out Turkey is behaving like a “bull in the china shop,” said Umit Ozlale, a professor of economics at Ozyegin University in Istanbul.
“This is damaging for the country in the medium- to long term,” he said. “Opening an investigation against JPMorgan isn’t reasonable at all, it was an outcome of authorities getting aggressive.”
To contact the editor responsible for this story: Paul Abelsky at pabelsky@bloomberg.net
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