Investors should sell Turkey and run, economics academic says

Investors should sell Turkey and run because of the damaging economic policies of President Recep Tayyip Erdoğan’s government, economist and academic Tim Worstall said.

Turkey’s economic situation will go from bad to worse, Worstall wrote in a column for Seeking Alpha on Tuesday, pointing to Erdoğan’s latest mistake – the sacking last weekend of Central Bank Governor Murat Çetinkaya for opposing lower interest rates.

Erdoğan’s failure to understand the relation between interest rates and inflation, perhaps based on his Islamic beliefs, are putting the country in particular danger, said Worstall, who is a fellow at the Adam Smith Institute in London and a regular commentator in the U.K. press. Erdoğan believes higher interest rates cause inflation, the opposite of commonly held economic theory.

“The central bank was the only restraining influence upon Erdoğan's misunderstandings of economics,” he said. “Now that it's obvious that Erdoğan also controls monetary policy I think things are going to get significantly worse.”

Erdoğan already had a free rein over the budget and the rest of the economy after installing his son-in-law Berat Albayrak as Treasury and Finance Minister last summer, Worstall said.

“Now, it's possible that the person best qualified to run the economy just happens to be the guy your daughter likes sleeping with,” he said. “But that it's the President's daughter? How much of a coincidence is that?”

Governor Çetinkaya raised interest rates by 625 basis points to 24 percent last September, against Erdoğan’s wishes, in order to stabilise the lira during a currency crisis. Erdoğan, eyeing his party’s campaign for local elections this year, has also objected as the governor kept rates on hold since.

The president has now installed Çetinkaya’s deputy, a known interest-rate dove, as Çetinkaya’s replacement, terming him as “a friend from the finance industry” in comments to local media published on Wednesday.

Under Çetinkaya, inflation had slowed to 15.7 percent in June from a 15-year high of 25.2 percent in October. Although the lira has continued to fall against the dollar – it’s down about 8 percent this year – losses have lessened from last year’s 28 percent slump.

Investors may soon get their fingers burnt again, Worstall said.

“I expect - not quite predict, just expect - inflation to rise, the lira to fall as a result,” he said. “Bond and stock prices are going to fall significantly from where they are. Now's a great time to be out of Turkish investments.”