Erdoğan’s way or bust after Turkish central bank chief fired

It appears that if Turkish President Recep Tayyip Erdoğan has taken one lesson from his party’s defeat at the Istanbul local election last month it is to tighten his grip on the economy. 

Opinion polls conducted by his governing Justice and Development Party (AKP) show that some of its supporters have turned their back on the movement because of Turkey’s economic difficulties.

Thus, Erdoğan appears to have concluded that measures taken since last year’s August currency meltdown, and in particular the central bank’s emergency rate hike that took interest rates to 24 percent, designed to arrest the slump and rein in skyrocketing inflation, have brought a substantial loss in public support.

In the world according to Erdoğan, the higher interest rates are, the higher inflation becomes. 

Having lost the rerun of the Istanbul election – his party had already surrendered the capital Ankara on March 31 when original votes were cast nationwide – Erdoğan said he would focus on the economy until Turkey’s next elections in 2023, the country’s centenary. Many observers of Turkey had thought those pledges would mean a return to economic orthodoxy after a succession of ad-hoc, unorthodox steps during the past few months.

But it appears that Erdoğan has chosen a very different path. 

Erdoğan stated his intent on the economy when he decided to issue a presidential decree at midnight on Friday to sack Central Bank Governor Murat Çetinkaya, reportedly for failing to cut interest rates.

That same approach was clear last week, when his son-in-law and Treasury and Finance Minister Berat Albayrak appeared in public to give a speech to bankers after a months-long absence.

Albayrak espoused the same old rhetoric about the strength of Turkey’s economy and how speculators have failed in attacks against the lira.

So, it now appears Turkey’s alpha-male president is not willing to share power with anyone and is ready to risk all on the economy to maintain his standing in the eyes of the electorate.

Erdoğan looks set to go for economic growth at all costs. For now, he doesn’t seem to have twigged that the country’s high growth period was funded by cheap money from abroad in the wake of the global financial crisis of 2008, and those funds have now dried up.

Thus, Erdoğan will pursue his own economic policies even if they end up suffocating the economy. 

On Sunday, Hurriyet newspaper quoted Erdoğan as telling his party’s officials that Çetinkaya was fired because he was “told numerous times to cut the rates and he refused.”

Meanwhile, Erdoğan and Albayrak continue to blame the disastrous results of macroeconomic policy and a rapid devaluation in the lira on “attacks by foreigners” who are intent on preventing the global rise of Turkey. Weird as this may sound, when knowing how the same foreign investors have financed Turkey’s strong economic growth throughout the last decade, the president’s closest circle of advisors are also hung up on such theories.

Assuming Erdoğan will persist in his economic approach, one should assume that he will not relent to calls from investors to remove Albayrak from his post. Keeping Albayrak will also mean that Erdoğan and the AKP can continue to tap Treasury resources unhindered despite a shockingly wide budget deficit that will be doubling by the end of 2019 as a percentage of GDP to 4 percent.

Moreover, with the almost brutal removal of Çetinkaya, the central bank is now openly subservient to the government and will start serving the president through a rapid cycle of rate cuts. The central bank’s autonomy, granted after Turkey’s 2001 economic meltdown then weakened gradually, is now totally eradicated.    

What is hard to understand however is that Turkey’s inflation slowed some three basis points to 15.7 percent in June. It was around 20 percent at the start of the year. The slowdown in prices had already paved the way for the central bank to be able to cut rates. The central bank had signaled it would seek to balance fighting inflation with the government’s growth goals and perhaps pull down the policy rate to 18-20 percent by the end of the year.

The election dramas were over, the lira was relatively robust -- mostly thanks to a very strong tourism season and collapsing current account deficit -- and growth and sentiment indices were expected to remain stable through the summer. Turkish citizens could therefore have been expected to tune back in to the lira, selling some of their now huge FX deposits stock of $176.4 billion.  Apart from political tensions with the United States over plans to purchase Russian S-400 missiles, the Turkish economy and markets had become calmer.

But now, the sacking of Çetinkaya a year before his term was due to expire has reminded everyone just how unpredictable the management of Turkey’s economy is, and how rule-based it isn’t. 

Erdoğan is undermining Turkey’s economic institutions and assuming almost total control of the economy because the governing AKP has become so desperate to turn things around.

Troubled loans in the banking industry are now about 11 percent of total loans and the current account is almost in balance because of an economic contraction set to average 3 percent this year.  Inflation stands at almost 16 percent and the budget deficit has widened exponentially.

Erdoğan and the AKP know that, as things stand, the economy will be stuck in a growth band of between 2 percent and 3 percent in the years to come.   

No need to say, Turkey’s chronic economic troubles will become acute sooner rather than later, given Erdoğan’s mismanagement and his strong faith in his ways, to the exclusion of everyone else. The President could be trying to tame the economic dog, but the dog might just bite him back.