Jul 09 2018

Lira slumps as Erdogan places son-in-law at helm of economy

The Turkish lira dived after President Recep Tayyip Erdoğan appointed his son-in-law to take charge of the economy, deepening concern about the direction of the economy.

The lira fell 3.8 percent to 4.75 per dollar late on Monday, before recovering slightly on Tuesday to trade at 4.71. Losses for the year now total about 20 percent. The BIST-100 stock index in istanbul dropped 2.8 percent to 96,521 points. 

Erdoğan, inaugurated as president with vastly enhanced powers on Monday, gave Berat Albayrak, married to his daughter Esra, the keys to the treasury and finance ministry in a new merged role. He ignored names favoured by investors such as former Deputy Prime Minister Mehmet Şimşek and Finance Minister Naci Agbal.

The president’s announcement may spell the end of an era in which pro-market figures adhering to conventional policies held the reins of economic office in Turkey. That period stretches back to 2003, when Erdoğan took power as prime minister and stuck to an IMF program to restructure the economy and tame inflation.

“Albayrak will have to move very quickly to re-assure financial markets - and will need to send a signal that he will listen,” said Tim Ash, senior emerging markets strategist at Blue Bay Asset Management in London. “The economy faces a challenging time and this is a time for orthodoxy.”

The appointment of Albayrak, 40, who formerly served as energy minister, now raises concern that Erdoğan and his closest confidants will take more control of monetary policy and may start lowering interest rates to stimulate economic growth and employment. Erdoğan had promised that he would do exactly that in May, sending the lira plunging to a record low of 4.92 per dollar and forcing the central bank, rendered autonomous under IMF reforms, to raise rates by 425 basis points to 17.75 percent.

Right before his inauguration, Erdoğan issued a decree giving himself direct power to appoint the central bank’s governor and his deputies.

Erdoğan’s senior economic adviser, Cemil Ertem, said on Tuesday that monetary and fiscal policy is now being harmonised and the process will continue apace.

According to Erdoğan, high interest rates cause inflation, a view that jars with conventional economic wisdom.

Erdoğan has stimulated the economy with measures such as tax cuts and government-backed loans for industry to push growth higher. The economy expanded an average of more than 8 percent in the nine months to March. The measures have fuelled inflation and the current account deficit.

Economists are expecting the central bank to raise interest rates again at a meeting on July 24 after inflation surged to 15.4 percent, more than three times the average in emerging markets, from 12.2 percent the previous month. Its failure to do so would send the lira sliding again.

Concerns over Erdoğan’s appointment of Albayrak pushed yields in a Treasury auction of 10-year lira debt to a record high of 17.6 percent. Two-year paper returned 20.4 percent.

The weaker lira is also making it more difficult for Turkish firms to repay more than $220 billion in foreign currency-denominated loans. Major corporations including Yildiz Holding, the owner of Godiva chocolates, have already applied to banks to renegotiate the terms of about $20 billion in such debt.

Most of the cash was borrowed from Turkish banks, whose balance sheets are now being squeezed by non-performing loans and the restructured lending, meaning they have fewer fresh funds to lend out again.

Garanti Bank, a favorite with foreign investors, saw its shares decline 5.8 percent to 8.07 liras on Tuesday, the biggest loss in more than two years.

Any plans by Erdoğan to depart further from conventional economic policies are likely to be punished by ratings agencies as well. Moody’s and Standard & Poor’s have cut the country’s sovereign debt further into junk territory citing the government’s failure to tackle inflation and the resultant impact on the lira and debt costs.

Albayrak has a Masters degree from New York Pace University. He was CEO of Turkish energy company Calik Holding between 2007 and 2013.