Mark Bentley
Nov 22 2017

Erdoğan economics pushing lira to cliff edge

Turkish President Recep Tayyip Erdoğan has become the source of the country’s economic woes.

Once known as a fiery, but prudent politician who drove economic reform and Turkey’s bid for membership of the European Union, Erdoğan is now a liability.

If one were to draw a price graph, in which Erdoğan’s behaviour was plotted on the horizontal axis versus the depreciation of the lira on the vertical, one would see a curve that is bending skywards at an ever-increasing rate.

Just as a stock market can be seen as a measure of human development in the long term, a currency is a barometer of confidence in the country’s economy. A currency that gains in value does so because of an improvement in the collective psychology of that currency’s holders.

When a political leader increases his power over a country, its politics and economy, so, consequently, does that person’s performance become the main reference point when deciding, as a saver or investor, whether to hold that country’s currency or not.

Whereas Erdoğan once entrusted strong political allies to help him run Turkey – Ali Babacan for the economy, Abdullah Gül in foreign policy for example – he is now attempting to rule alone. Parliament has been sidelined, emergency rule is in place and the presidential palace in Ankara is filled with advisers that adhere to his skewed view of the world. There is hardly a minister who doesn’t wear an Erdoğan moustache.

And, unsurprisingly, the lira is tanking.

The currency, the worst-performing major currency this year, reached a record low of 3.98 per dollar early on Wednesday. It has lost almost 15 percent of its value since September.

Lira futures -- contracts to exchange lira for dollars at a fixed rate on a specified date -- show that investors expect the currency to slide to 4.12 per dollar in March, 4.25 in June and 4.51 by the end of next year. December 2018 contracts were trading at 3.86 liras per dollar just two months ago.

Turkish lira December 2018 futures contracts

Erdoğan, known as a control freak even in his early years as prime minister – he would call ministers in the middle of the night to ‘confer’ on policy, now has the country in his hands. A referendum on presidential powers, won controversially in April, has seen to that.

But now he is micro-managing more than ever. Fear, an authoritarian’s weapon of choice, has rendered virtually every other policymaker in the country impotent and dependent. Including the Foreign Ministry – its history still a source of pride for many Turks – and the central bank, made fully independent by Erdoğan during his early years in power.

And policy-making, once focused on furthering Turkey’s national interests both at home and abroad, is now wielded at Erdoğan’s personal whim. In Erdoğanistan, the country’s national interests are, in his very words, inexorably intertwined with his own. An attack on himself is an attack on the country as a whole. Period.

So, when Reza Zarrab, an Iranian-Turkish gold-trader with close business ties to Erdoğan’s inner circle, was arrested in Miami on a family trip to Disneyland last year, Turkey made it national policy to get him freed.

So much so, that the Foreign Ministry sent diplomatic notes to the State Department last week demanding to know where Zarrab was and whether he was in good health. His disappearance from court documents and a lockup in Manhattan strongly suggest that he has turned state’s witness. Prosecution evidence asserts that Erdoğan’s former economy minister and a senior executive of a state-run bank colluded in a money-laundering scheme to break U.S. sanctions on Iran.

Zarrab
Iranian-Turkish businessman Reza Zarrab

And when it comes to economic policy, Erdoğan’s interests and views dominate. Those interests are focused on construction and real estate – feeding an industry that both satisfies his ego for “mega projects” aimed at leaving his mark on history, and driving economic growth through a system of often-opaque state tenders and land deals awarded to his business allies.

As part of that plan, Erdoğan has transferred state-owned assets into an off-budget wealth fund, outside of parliament’s control, to help fund the projects. The assets include a 49 percent share in Turkish Airlines and 51 percent of Halkbank, the lender embroiled in the Zarrab scandal.

In order to feed this machine, Erdoğan is demanding that interest rates are kept down, despite double-digit inflation and the lira’s ever-sharpening trajectory. Higher interest rates, which would go some way to halting the lira’s recent losses, will merely serve to cause more inflation, not less, he maintains.

But, as Cemil Ertem, Erdoğan’s chief economic adviser, said on Tuesday, the president’s motivations go far beyond domestic economics.

Erdoğan, as Ertem wrote in Milliyet, sees interest, and its alleged impact on inflation, as a tool of Western powers to keep countries such as Turkey on a leash -- Bretton Woods, Thatcherism, Reaganomics, the Fed under Paul Volcker, all apparently show how interest rates were used as a weapon of the powerful.

Those days are now gone, Ertem maintained, just as, thanks to Erdoğan, the era in which five countries rule the world via the U.N. Security Council is coming to a close.