Erdogan Feasts on Chaos While the Lira Suffers
(Bloomberg Opinion) -- It's almost like Turkey desires an economic crisis. Threatening to expel envoys from powerful allies days after a massive and widely derided interest-rate cut was a recipe for the currency’s nose dive.
That's precisely what President Recep Tayyip Erdogan got: The lira fell to a record low against the dollar in early Asian trading Monday. It's down about 24% this year, making it the worst performer among emerging market peers. There are few good outcomes for the country, even after allowing for U-turns on some of Erdogan’s most contentious measures. Monetary and diplomatic policy look increasingly driven by the need for controversy and brinkmanship.
Erdogan said Saturday that the ambassadors of 10 nations, including the U.S., Germany and France, were no longer welcome in Turkey after they demanded the release of a prominent businessman and philanthropist. Investors are watching for the Turkish foreign ministry to make the move official. Holding off on that formal step gives the president a path to defuse the situation.
While the foreign-policy fracas isn't directly linked to last week's shock 200-basis point rate reduction, it serves a similar purpose: the erosion of confidence in Turkey’s ability to manage relations with capital and allies. Why would Erdogan seek to undermine the currency, often seen as a barometer of economic health? Perhaps he is trying to underscore — or foment — the idea that dark forces are out to get Turkey, and he is the only guy who can stand up to them.
In this environment, can capital controls be far away? Either that, or another zigzag might be in the offing, at least in terms of economic policy. Though analysts expected some reduction in interest rates after a recent purge of the central bank’s policy committee, the cut was far larger than anticipated. There are big problems with easing monetary policy so dramatically: The one cited most often is that inflation is going in the opposite direction. Consumer prices jumped 19.6% in September from a year earlier; the benchmark rate now stands at 16%. In many economies of consequence, accommodation is being withdrawn, not expanded. Swimming against the tide may delight Erdogan, but it also comes with a price.
Erdogan may not necessarily be wedded to this stance. Late last year, unhappy with inflation and anxious to bolster a languishing currency, the president installed a central bank governor who raised rates aggressively — until he went too far and was fired in the dead of night. His successor, Sahap Kavcioglu, took a while to undo that hard work, but seems to have gotten the message. His choice may have come down to protecting his career or the lira. If last week’s events proved anything, it’s that the latter would take the fall. Next month, who knows?
It’s entirely conceivable Turkey is on the verge of another shift. But with each turn, investor confidence ebbs a bit more. And tightening might be seen as caving to the economic establishment. Erdogan has an unorthodox view that high interest rates cause, rather than quash, inflation. He has sometimes said that conventional monetary thinking is part of a plot to undermine Turkey.
It’s one thing to pick fights with dismal scientists. But why would Erdogan court the ire of Turkey’s most important allies? He says the country can no longer afford to host the envoys after they signed onto the joint call for the release of Osman Kavala, who stands accused of participating in a failed 2016 coup attempt against the president. Kavala denied collaborating with followers of U.S.-based Islamic cleric Fethullah Gulen, who Erdogan says orchestrated the attempted putsch. A Turkish scholar in the U.S., Henri Barkey, is being tried in absentia in the same hearings.
Erdogan seems willing to make the lira collateral damage of his political aims and messaging. But it doesn’t have to be this way. Turkey's growth this year is likely to be quite strong. The situation isn’t hopeless. A reversal in economic direction and embrace of higher borrowing costs could possibly be sold — and at least to voters sympathetic to the president — as an investment in Turkey’s trajectory.
Meanwhile, the tumult will continue — until Erdogan decides he needs to deescalate, before ratcheting up once more. This is the way insecure banana republics behave, not members of the North Atlantic Treaty Organization or the Group of 20 leading economies. It’s not too late to alter course. Erdogan has had enough practice.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.
©2021 Bloomberg L.P.