Jul 08 2019

Turkey's dismissal of central bank governor spurs foreign media fears

The decision to sack Central Bank of Turkey governor Murat Çetinkaya on Saturday sparked fears that Turkey’s Justice and Development Party (AKP) government was leading its economy toward a precipice. After the lira slid considerably on Monday, a host of foreign press reports agreed that those fears were well founded.

Çetinkaya was the first central bank governor to be dismissed since the post-coup regime in 1980. Turkish President Recep Tayyip Erdoğan confirmed speculation that he had been dismissed for failing to lower interest rates on Saturday, telling AKP lawmakers Çetinkaya “had not done what was necessary” when he was told repeatedly to cut interest rates.

Erdoğan has stated that interest rates are the cause of inflation – “a view roundly mocked by economists”, who tend to hold that the opposite is true, the Economist magazine said.

“Assailing economic orthodoxy, he has claimed that high interest rates actually cause inflation, which is like blaming obesity on cutting too much sugar from the diet”, Peter S. Goodman wrote for the New York Times.

The Economist was one of many foreign publications to raise concerns on the damage the governor’s dismissal would deal to the lira, quoting asset managing firm GAM’s investment director, Paul McNamara, as saying the best Turkey could hope for was a “lira sell-off that keeps rates higher than they otherwise would have been”.

“The worst case is that they set off a currency avalanche”, he said.

The lira fell 2.5 percent against the dollar on Monday morning after markets opened.

Goodman was one of many commentators to lament the damage the decision had done to the central bank’s credibility, which he said had been sacrificed in favour of further growth “at all costs” with a strategy based on “pumping credit to Turkish businesses and households”.

“The government is so wedded to this consumption model this will ultimately lead to an economic breakdown”, Goodman quoted Chatham House Turkey expert as saying.

“(Investors) are concerned that the sacking of Mr Cetinkaya means that Mr Erdogan will seek to ‘short circuit’ the sharp slowdown in growth that has allowed Turkey’s overheated economy to cool in the wake of the August currency crisis”, the Financial Times reported on Monday.

The country has experienced a torrid time since last year, when the lira fell by 28 percent against the dollar, driven partly by a nosedive after Washington imposed sanctions in August for the jailing of an American pastor.

Turkey is at risk of another round of sanctions this month due to its purchase of Russian S-400 missile defence systems. There is bipartisan agreement in the U.S. Congress that the purchase warrants sanctions under the Countering America’s Adversaries Through Sanctions Act, and Washington has informed Ankara of its intention to level sanctions if the deal goes through.

With the delivery of the first S-400s due this week, Çetinkaya’s successor, Murat Uysal, faces a “baptism of fire”, the Economist said.

Emirati newspaper The National said the timing of the governor’s dismissal with the S-400s’ arrival imminent had left international investors “spooked”, and said by casting doubt on the central bank’s independence, Erdoğan may have laid the groundwork for a repeat of the recession experienced in the last quarter of 2018.

Concerns were raised about the new governor on Monday, when convincing evidence was unearthed showing that Uysal’s master’s thesis – on inflation – had been largely plagiarised.

But the governor’s qualifications will largely be a moot point if he performs as most commentators expect and follows Erdoğan’s orders to cut interest rates at a fiscal board meeting later this month.

The Turkish president’s hold over the central bank is a “worrying template for what could happen should Donald Trump gets his wish for similar power over the Federal Reserve”, Business Insider said on Monday.

The business news site referred to Trump’s attempts to “stack” the Federal Reserve with his own appointments, and said a precedent in the United States, when former president Richard Nixon had pressured the Fed to keep interest rates low, had led to a decade of high inflation and turbulence.

While the Business Insider said the possible economic problems in the footing for Turkey should be a “warning” for Trump, The National said Erdoğan may have planted the seeds of his own downfall if the country enters a recession and Turks show their anger at the ballot box.

With a maelstrom already in the making for Turkey’s economy, Erdoğan could face even stiffer political competition than usual with the hotly expected establishment of a new political party under Ali Babacan, who announced his resignation from the AKP on Monday.

Babacan, a former minister and deputy prime minister and one of the architects of the ruling party’s economic policies in previous governments, is highly regarded in international economic circles. His reported plans to launch a new economically liberal political party this autumn could pose a serious challenge to Erdoğan, especially if AKP deputies jump ship.

“It has become inevitable that we initiate a new project for Turkey’s present and future. Many of my friends and I feel a great and historic need for such a project,’’ Babacan said.