Turkey should clear out officials responsible for economic missteps - analysts

Turkey’s government should hold to account or replace senior banking and economy officials who are to blame for bringing the country to the brink of a financial meltdown, analysts said.

The Turkish lira has slumped to successive record lows against the dollar this year, losing about a quarter of its value, after the Treasury and Finance Ministry, banking regulator and central bank implemented unorthodox monetary and financial policies to help the government steamroll growth.

The series of economic missteps, which included keeping interest rates below inflation and forcing banks to flood the economy with cheap loans, has left the central bank’s war chest of foreign currency reserves severely depleted as it struggles to keep the lira stable.

The central bank was forced to claw back its lax monetary policy and hike interest rates to 15 percent from 10.25 percent last week to stave off a currency crisis, which would have been the second to hit the economy in two years.

Turkish President Recep Tayyip Erdoğan replaced the governor of the central bank on Nov. 7, the day after the lira fell to an all-time low of 8.58 per dollar. His son-in-law, Berat Albayrak, resigned as Treasury and Finance Minister on Nov. 8. Erdoğan has installed Lutfi Elvan, a former deputy prime minister to take his place.

On Tuesday, the nation’s banking regulator abolished a much-criticised asset ratio requirement for banks that had forced them to lend more to businesses and consumers.

Now other senior officials must be held accountable as Turkey works to rebuild its reputation with investors and Turkish savers, Hakan Kara, the central bank’s former chief economist, said in comments on Twitter on Tuesday.

“There needs to be a wholesale clear-out,” said Tim Ash, a senior emerging markets strategist at BlueBay Asset Management in London, pointing to officials at institutions such as the central bank and the Treasury and Finance Ministry.

Former Treasury and Finance Minister Berat Albayrak presents Turkey's economic programme in September

Kerim Rota, who worked as the head of treasury of Akbank, one of the country’s biggest non-government banks, said people should not escape punishment for their errors.

“Those who damaged the country from seats they acquired through their political connections will be held to account,” said Rota, who now works for the Future Party, a new political group led by former Prime Minister Ahmet Davutoğlu.

Turkey’s central bank should replace several officials of its seven-member Monetary Policy Committee with people including Kara and former Federal Reserve economists Selva Demiralp and Refet Gürkaynak, Erik Meyersson, senior economist for the Eurozone and emerging markets at Handelsbanken, said last week.

Turkey’s lira, which has rallied to as strong as 7.5 per dollar after Erdoğan hired former finance minister Naci Ağbal as the central bank’s new governor, has since weakened to almost 8 per dollar as investors and local deposit holders hesitated to put their capital back into the lira.

Turks have bought billions of dollars of foreign currency in the past few months, increasing the FX deposits in the banking system to 57 percent of total deposits from 50 percent in July.

Turkey’s attempts to rebuild monetary policy credibility will take time, ratings agency Fitch said on Friday. It warned that the central bank’s defence of the lira had reduced net foreign exchange reserves, minus swaps, to a negative $46.5 billion from $22.7 billion at the end of last year.

“The sacking of two central bank governors over the last 16 months underlines the lack of independence from political pressure,” Fitch said in a report. “It remains to be seen how policymakers will resolve the trade-offs between boosting growth and reducing external and domestic imbalances over time.”

The government’s economic programme, which targets average growth in GDP of 5.3 percent between 2021 and 2023 along with a slowdown in inflation to 4.9 percent and the current account returning to balance is “unrealistic”, Fitch said.

Consumer price inflation in Turkey stands at 11.9 percent and is expected to accelerate in the coming months.

Fahrettin Altun, Erdoğan’s chief communications director, said on Monday that the government expected the central bank to implement balanced and rational monetary policies as it battled inflation. It needs to take account of statements by Erdoğan highlighting the damage to investment caused by high interest rates, he said in an interview with the Daily Sabah newspaper on Monday.