May 15 2018

IHSMarkit economist believes Halkbank fine will be high enough to cause a crisis

Turkish President Recep Tayyip Erdoğan is “doubling down” on his controversial economic policies as he seeks re-election in June, Andy Birch, an economist at IHSMarkit, told Ahval TV.

Birch, who has been studying and publishing analysis on the Turkish economy for over a decade, warned on Tuesday that expansionary fiscal policies, a series of “half measures” by the central bank and tensions in Iran and Syria made the situation unsustainable as the country prepared to go to the polling booths.

“He’s doubling down on a strategy that’s worked for him before following these populist measures and hoping that a financial crisis does not sprout up,” he said. “It’s unsustainable, it’s unsustainable in the long term and the question is can it last him through the election, when there might be some move to normalising economic policies afterwards.”

Turkey’s lira hit a new record low of 4.46 per dollar on Tuesday and benchmark 10-year bond yields surged to a record 14.5 percent after Erdoğan told Bloomberg Television that he would take more control over monetary and economic policy after the elections. Erdoğan reiterated his view that Turkey must lower interest rates to spur growth and lower inflation.

Conventional economic theory dictates that higher rates tame price increases.

Birch said there was now concern that Erdoğan won’t “pivot” and follow more rational policies after the vote. 

“Frankly the situation right now is very challenging to try and rescue the lira,” he said.

Mark Bentley, former Turkey bureau chief for Bloomberg and a contributor to Ahval, warned that the current account deficit, which has reached more than 6 percent of economic output, was at unsustainable levels as portfolio inflows from abroad reversed. An increase in tourism revenues, while positive, was not enough to have a significant positive impact, he said.

Birch and Bentley warned that ongoing proceedings against state-run Halkbank in the United States for allegedly breaking U.S. sanctions on Iran could result in a fine that would have a massive impact on the economy. While the decision by the Justice Department will probably come after the election, there was still the risk that the fine may be announced beforehand, Bentley said.

Andy Birch, in late April, published an in-depth report on Halkbank and about the looming bank fine by the U.S. authorities.

A U.S. judge is due to sentence Halkbank executive Mehmet Hakan Atilla for his role in the scandal on Wednesday. It is expected for the U.S. Treasure to impose a fine, estimated to be in billions, following the sentence of Atilla.

Birch told AhvalTV that whether the fine on Halkbank could destabilize the financial sectors of Turkey is not known yet. Birch said "we believe that the fine will be high enough to cause a crisis in Halkbank." Birch also stated that the Halkbank might need some sort of government support following the fine.

Full interview is below: