Turkey's economic managers bracing for policy minefield - Bloomberg

The hurdles facing Turkey’s new economic managers in undoing the effects of Berat Albayrak’s interventionist policies could spell trouble for their market-friendly initiatives, Bloomberg said on Wednesday.

The removal of restrictions following the finance minister’s departure, as part of a plan to prevent speculators shorting the Turkish currency, has done away with a rule compelling lenders to extend credit and hiked interest rates by the most in over two years, it said.

But such moves will “do little to rebuild dwindling foreign exchange reserves,’’ according to Bloomberg, while furthering increasing pressure on the currency in the short term.

Turkish President Recep Tayyip Erdoğan’s son-in-law, Albayrak, oversaw economic policy for two years, during which Turkey endured economic slowdowns, a 45 percent slide in the lira and the coronavirus pandemic.

Albayrak’s departure is expected to usher in an overhaul of Turkey’s unorthodox economic policies, which have seen authorities use up an estimated $100 billion of reserves this year to curb the lira’s slump.

“The return to market orthodoxy has been welcomed by investors, who’d balked at Erdogan’s contrarian assertion that higher rates fuel inflation,’’ Bloomberg said

Analysts now expect a  “further easing of limits on currency swaps and derivatives deals that local banks can carry out with foreign counterparts,’’ it said, a move that had made it costly to access the lira offshore.

“Unwinding swap restrictions may create volatility in central bank reserves and the currency, which could weigh on market sentiment,” Hakan Kara, chief economist at the central bank from 2003-2019, told Bloomberg. 

“The authorities should design a plan in coordination with banks to ease the offshore restrictions gradually and meanwhile conduct central bank FX purchases to replace the swaps,” he added.