Erdoğan silence over Albayrak resignation deafening as Turkish lira rallies

Turkish President Recep Tayyip Erdoğan’s silence over the resignation of his son-in-law as head of the Treasury and Finance Ministry is befuddling investors and raising questions over the direction of economic and monetary policy.

Albayrak issued a statement on his Twitter account on Sunday announcing that he was stepping down from his position as head of Turkey’s economic team. But Turkey’s mainstream media, which has long acted on Erdoğan’s behest, have not reported it, awaiting confirmation from his office.

The lira rallied strongly against the dollar on Monday as some investors bet that Albayrak’s departure would usher in an overhaul of Turkey’s unorthodox economic policies. Erdoğan sacked the governor of the central bank on Saturday and appointed a respected technocrat in his place, fuelling expectation that policy would take a more traditional path.

But the Turkish Treasury and Finance Ministry’s website still showed Albayrak as head of the ministry on the front page of its website on Monday, alongside a caption of him presenting details of Turkey’s latest economic programme.

“Incredible,” said Tim Ash, senior emerging markets strategist at BlueBay Asset Management in London. “I guess they are all at the Palace trying to sort issues in the family out.”

Erdoğan appointed Albayrak, married to his daughter Esra, in his first major act as president after being re-inaugurated for a second term with vastly increased executive powers in July 2018.

Albayrak, 42, set about implementing an economic programme heavily influenced by Erdoğan’s thinking. His policies included using state-run banks to engineer a borrowing boom by businesses and consumers and leaning on the central bank to keep interest rates at below annual inflation. Erdoğan has frequently asserted that higher interest rates are inflationary, jarring with conventional economic wisdom.

The central bank has burned through tens of billions of dollars of its foreign currency reserves this year to stabilise the lira without raising interest rates, prompting ratings agencies to downgrade the country’s sovereign debt. Erdoğan became increasingly uncomfortable with the level of the reserves, contributing to the sacking at the weekend of Central Bank Governor Murat Uysal, according to Bloomberg.

The Turkish lira has slid to a series of record lows this month after the central bank kept its benchmark interest rate unchanged at a meeting in late October. It hit an all-time low of 8.5876 per dollar on Friday, taking losses this year to more than 30 percent. It traded up 2.7 percent at 8.288 per dollar on Monday.

In his first public statement as central bank governor, Naci Ağbal, formerly head of Erdoğan’s economic strategy and budget committee – he served as finance minister between 2015 and 2018 – reiterated the central bank’s commitment to tackling inflation, which stands at an annual 11.9 percent. But he stopped short of promising rate hikes to help stabilise the lira. The bank’s benchmark interest rate stands at 10.25 percent.

“The central bank will decisively use all policy tools in pursuit of its price stability objective,” Ağbal said on Monday.

Analysts questioned whether Ağbal would be given the freedom to hike interest rates in any meaningful way, or whether his appointment was merely window-dressing by Erdoğan.

Foreign financial institutions say a swift and large hike to interest rates may be needed to bolster the lira. An increase in borrowing costs of at least 5 percentage points may be necessary, Dutch bank Rabobank said last week.

Ağbal had worked under former Turkish economy chiefs Ali Babacan and Mehmet Simsek as undersecretary of the Finance Ministry, but his most recent tenure at the presidential palace ran in parallel with a sharp increase in Turkey’s budget deficit.   

“I see Ağbal’s appointment as part blame allocation, part cheap talk,” said Erik Meyersson, senior economist at Handelsbanken. “RTE (Erdoğan) can keep changing central bank governors like they are Ottoman grand viziers (and blame them for his incompetence), but they’re not the problem, the institutions are.”