Erdogan Races Against the Dollar in Campaign for Unrivaled Power

(Bloomberg) -- Turkish President Recep Tayyip Erdogan has lambasted friend and foe alike in a campaign for vast new powers, but his political fate may hang on the one thing he’s stopped carping about: the price of money.

With the April 16 vote on strengthening the presidency too close for pollsters to call, Erdogan is no longer berating the central bank and commercial lenders over borrowing costs they’ve pushed to a five-year high. He’s betting any measures taken to arrest the lira’s plunge will pay off at the ballot box.

The lira’s value versus the dollar is more than just a pocketbook issue in Turkey, where millions of voters still remember the abrupt devaluations that ravaged their livelihoods in past decades and view the exchange rate as the most important indicator of the nation’s economic health.

Turkey’s trade deficit is the biggest of all top 50 economies relative to output and most of its imports and foreign debt are priced in dollars, so sharp declines in the lira can be ruinous for legions of entrepreneurs like Ramazan Saglam, who owns a print shop in a working-class neighborhood of Ankara.

“I bitterly recall when the dollar jumped in 1994 and 2001 -- my business collapsed both times,” Saglam said. “I’m supporting the new presidential system wholeheartedly because I don’t want to go bankrupt again.”

Dollar Addiction

Saglam nodded at the big red banner billowing from his second-story window to illustrate his point. The Chinese cloth and South Korean ink he used to make it were all bought with dollars, as was the American printer that produced Erdogan’s image and the slogan, “Yes. For my country and my future.”

Given the choice between paying more for credit to buy supplies and keeping the lira in check, he said he’d choose sound money every time.

Supporters of the proposed constitutional changes say handing Erdogan sweeping new authority is the only way to achieve the stability that society craves and businesses need to thrive. But opponents say approving the referendum is an invitation to dictatorship, particularly since Erdogan, already the most dominant leader in eight decades, jailed or fired more than 100,000 perceived enemies after rogue army officers attempted a coup in July.

“Everybody on the street tracks the exchange rate on a daily basis and Erdogan wins support as long as Turkey can keep the lira stable,” said Wolfango Piccoli, the London-based co-president of Teneo Intelligence, a political risk advisory firm. “But the challenge here is the external backdrop. They can’t really predict what’s coming.”

Million to One

When Erdogan was born in 1954, just after predominantly Muslim Turkey aligned with the West by joining NATO, the lira was pegged at 2.8 per dollar.

By 2001, after multiple coups and bouts of hyperinflation, it took 1.55 million lira to buy a buck, a decline so steep the central bank had to print 20 million-lira notes. Erdogan moved quickly to end this “national shame” after he became premier in 2003, erasing six zeros and creating a new lira that was valued at about 1.35 per dollar when it was fully introduced in 2005.

But it’s been an uphill battle ever since. The lira breached 3 per dollar last year and flirted with 4 in January, prompting Erdogan to redouble efforts to rally the public to buy liras and end the “tyranny of the dollar.”

With the referendum clock ticking down, ministers, lawmakers and regulators are all scrambling to find ways to buoy the lira. One new program lets companies pay their dollar debt to the state in the national currency at preferential rates. Even the independent central bank has pitched in with unorthodox measures to curb currency speculation in addition to raising rates.

All of these initiatives, combined with what the Finance Ministry has called favorable global conditions, have helped stem the lira’s slide. It’s gained more than 7 percent since Jan. 11, when it hit an all-time low of 3.9415 per dollar.

Post-Putsch Drag

The political uncertainty over the referendum is adding to the post-putsch drag on the economy, which contracted in the third quarter for the first time since 2009. The government is cranking up spending to help cushion the blow, risking other problems such as further stoking inflation, which is already running at double digits for the first time since 2012.

The erosion of budget discipline, long an anchor of stability for the economy, is a reason that both Fitch and Moody’s have cut Turkey’s credit ratings to junk. The Finance Ministry has already warned that this year’s budget deficit may miss the government’s target of 1.7 percent of GDP by a full percentage point.

While Erdogan has stopped demanding cheaper credit to spur growth, at least for now, he continues to challenge the commonly held assumption that higher rates slow inflation. Last month, he urged “bosses of the finance sector” to be fair with consumers and avoid using interest as “a tool of exploitation.”

Those remarks came after lenders including Turkiye Garanti Bankasi AS and Akbank TAS, Turkey’s largest by market value, reported record earnings and forecast stable net interest margins, a measure of profitability, for all of 2017.

Credit Due

Erdogan loyalists say that while it may be impossible for him to achieve all of his economic and financial goals at once, his unflinching use of the bully pulpit to stick up for average Turks on such vital issues like the lira and borrowing costs should be enough to persuade most voters to expand his powers.

“I don’t understand all the criticism of Erdogan from secularists, we all suffered in the past -- from anarchy in the 80s, chronic inflation in the 90s and bickering coalitions after that,” said Burhan Cali, who runs an exhaust repair shop in an industrial district not far from parliament.

“If Erdogan resigns today, the lira would immediately plunge to 5 per dollar,” he said. “But if it gains, nobody can say he doesn’t deserve credit. He’s the captain of this ship and owns both the successes and the failures.”

--With assistance from Tugce Ozsoy

To contact the reporters on this story: Selcan Hacaoglu in Ankara at shacaoglu@bloomberg.net, Onur Ant in Ankara at oant@bloomberg.net.

To contact the editors responsible for this story: James Hertling at jhertling@bloomberg.net, Brad Cook