Turkey: a family-business or a global player?
According to the ruling Justice and Development Party (AKP), Turkey is like no other country in the world; it is a world leader in many arenas and builds mega projects like no other. Yet, the economic numbers tell an entirely different story: Turkey is no different to other countries that have overstretched and mismanaged economic policy. Now the time has come to pay the price for doing just that over the past decade.
President Recep Tayyip Erdoğan’s victory in the June 24 presidential elections has granted him unprecedented powers to mould Turkey in his own image. His strong win has also given him the confidence to appoint a cabinet that contains many ministers with a business background and no experience of government. The most controversial appointment was that of his son-in-law Berat Albayrak, who he appointed to lead Turkey’s economy at a time when it trying to navigate through stormy waters.
Many see Albayrak’s appointment as Erdoğan’s consolidation of power over the economy, which he had signalled in May during an interview in London. His pledge to cut interest rates in a country where inflation has now breached 15 percent then sent tremors through financial markets.
To limit the fallout of Erdoğan’s comments, Deputy Prime Minister Mehmet Şimşek, a former Merrill Lynch economist and investor favourite, was forced to fly to London to meet investors. The attempt at damage limitation was accompanied by a 425-basis point rate hike. Şimşek had promised investors a return to economic orthodoxy once the elections were over and they took the minister at his word. But what they got in return for their faith in Şimşek was to watch him cast aside in favour of Albayrak and to see Erdoğan returning to his true vision of economic management.
The 40-year-old Albayrak was described by the Financial Times as “difficult to deal with … haughty … has a very high opinion of himself … presents himself as crown prince in the making”. Nevertheless, optimists now argue that once he meets the investment community and grasps Turkey’s economic realities, he will be able to convince Erdoğan to switch to orthodox policies because the president trusts him like no one else in his inner circle.
Yet, this assumption might turn out to be dangerous and wrong.
Looking back at what Albayrak has said about recent economic turbulence in Turkey, he has offered only Erdoğan’s pitch about “foreign powers trying to attack the president and bring down Turkey”. Other comments include:
“The interest rate lobby is at work to stir the waters at home” and “rate hike demands to tame the lira are no more than an overseas operation” against Turkey. The list goes on.
During his three-year term as energy minister, Albayrak was busy with his remit and declined to comment on the daily course of the Turkish economy. Though Albayrak was always at Erdoğan’s side, reflecting that he was more than a minister, some market participants had long speculated that he was destined to get the economic remit.
But because the Turkish economy had started shaking due to its macro fragilities, not many expected Albayrak to be crowned with both control of the Treasury and the Finance Ministry so fast. And that at the cost of Şimşek, who was able to calm investors down and inject some orthodoxy into policy each and every time the president showed his true colours on the economy.
Times have changed with Erdoğan’s election victory. His decision on cabinet appointments late on Monday shows that he will not lose any time in forcing his own unique style on Turkey’s economic management.
Thus, Erdoğan showed no restraint this week in saying that “in the period ahead I believe that we will see that interest rates will fall” and that his son-in-law “will of course do whatever is necessary”.
In his quest to lower interest rates, Erdoğan has also asked Turkey’s private banks to give him a hand in reducing interest costs. Meanwhile, he has made no reference to fiscal or monetary discipline and to reforms that the Turkish economy needs so badly. Instead, he preferred to conspiratorially say “some people are trying to escalate things in Turkey”. Investors see such words as detachment from reality. And now, through his son-in-law, Erdoğan has sole control of the Turkish economy.
There has been no action from Erdoğan yet, just words. But the lira still sank to its pre-rate hike levels, reaching 4.98 per dollar from around 4.5 before the cabinet announcement. Worse-than-expected May current account deficit data was just “the icing on the cake” that added to the lira’s losses. Yields on Turkey’s 10-year and two-year government bonds have also jumped to record highs of 18 percent and 20 percent, respectively.
Three key events are in the pipeline. The first is an evaluation by ratings agency Fitch of Turkey’s sovereign debt, due on July 13. Next are G-20 meetings on July 21-22, where Albayrak will represent Turkey. Then, more importantly, is the central bank’s regular monetary policy committee meeting on July 24. With the lira back near 5 against the U.S. dollar, the market expects action from the central bank; some form of harmony of policy between Central Bank Governor Murat Çetinkaya and Albayrak in the form of a rate hike. All this comes at a time when inflation is expected to hit 18 percent within the next two months from the current 15.4 percent.
But, this time around, given Erdoğan’s enhanced powers and his plans for tightening his grip on the economy, even a rate hike would not be able to calm the markets. Rational talk by Albayrak at the G-20 would also not be enough for investors, who have grasped by now that talk is cheap.
Albayrak must prove very quickly that he will take the necessary steps on the economy. Or else he will lose credibility just as fast as investors will punish him for being a mere shadow of Erdoğan when it comes to policy.
Albayrak’s approach will set the pace of how quickly Turkey ends up knocking on the doors of the IMF for new financial help. It’s been a decade now since Turkey’s last of 19 programmes.
As well as the country’s macro-economic frailties, debt restructuring requests by Turkish corporates now exceed $24 billion and more are inevitably on the way. Consequently, non-government banks are refraining from extending fresh loans as they are coming under severe stress. And Turkey’s central bank only has about $25 billion in net foreign currency reserves to backstop them should the situation worsen.