Until a few weeks ago, it seemed likely that Turkey would become one of the most successful emerging markets this year.
Foreign investors, flocking to the country because of the attractiveness of high interest rates, were hoping that the central bank would obstinately curb inflation and that the Turkish lira would gradually improve compared to other currencies.
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Consequently, the Turkish economy was expected to wait for a year of strong growth.
But the sudden change of the Turkish Central Bank Governor by order of Recep Tayyip Erdogan on March 20, with the decision being issued in the Official Gazette at midnight Saturday, and the appointment of a person who seems intent on implementing the president’s financial policies, shook the financial markets and changed the scene in the country.
The surprise dismissal has once again highlighted Erdogan’s “unorthodox” view that high interest rates cause inflation.
The lira lost 15 percent of its value against the US dollar immediately after the opening of the financial markets, and the yield on 10-year lira bonds rose by about 5 percent in one day (a new record).
It appears that the investors, who have bought nearly $ 19 billion in assets in Turkey since Naci Agbal were appointed last November, have also decided to leave the country in large numbers.
Thus, it appears that many of Naci Agbal’s efforts during his many months in office to rebuild the credibility of the central bank and boost the level of confidence have been shattered.
Emerging Markets Worst Moments
Charles Robertson of Renaissance Capital, an international investment firm, says foreign investors feel betrayed.
He said in an interview with The Economist:
“What happened in Turkey is one of the worst moments for emerging markets in the last quarter century.”
It was no secret that there were many differences between Erdogan and Naci Agbal, and that Mr. Agbal was under pressure.
There were even rumors that he would be replaced by former Turkish Finance Minister Berat Albayrak. Few, however, expected this quick dismissal.
Accordingly, Robin Brooks says the blow to National Trust is very serious.
According to the chief economist, who works for the Washington-based International Finance Corporation (IIF), “even if he is introduced again as the trusted director of the Turkish central bank, no one knows how long he can remain in office.”
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Douglas Winslow, director of the Fitch Ratings Institute, believes that the decision to dismiss Naci Agbal, after only about five months in office, will increase the risks of “implementing a weak monetary policy” in Turkey in the coming months.
What Erdogan will try to avoid will come. That is, increased inflation and increased foreign investment risks.
Two other global rating agencies issued similar warnings after Erdogan fired the country’s central bank governor for the fourth time in two years.
“The clearest consequence of such a decision is that Erdogan’s opposition to high interest rates in the context of his unconventional views will lead to more inflation and damage the long-term credibility of the country’s monetary policy,” Douglas Winslow told Reuters.
Accordingly, the economist expects that the tariffs and other measures that will be implemented in this country from now on will significantly harm Turkish imports.
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The successor to Naci Agbal is a man named Sahap Kavcioglu. Who criticized Naci Agbal’s strict policies before.
Kavcioglu intends to implement Erdogan’s policies, and for this reason, in one of his first speeches after his appointment, he repeated Erdogan’s statement that raising interest rates would increase inflation.
This view has been widely opposed by economists.
What’s the solution?
It is possible that the market’s extremely rapid and negative reaction to this change and appointment will make Erdogan think.
In the words of Paul McNamara, investment director at Gam asset management company, Erdogan will finally be convinced that “a country with a lot of external debt does not have the freedom to set Low interest at the rate it wants.”
Paul McNamara points out that Turkey’s short-term foreign debt in January reached 140 billion dollars, which is about a fifth of the country’s gross domestic product.
On this basis, it appears that ultimately there is no choice but for Erdogan and the new head of the country’s central bank to surrender to the markets.
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Another way for the government is to require state-owned banks to keep the value of the lira high by selling billions of dollars of foreign exchange reserves, or to prevent foreign exchange from being transferred to foreigners in the short term, thus preventing their capital from leaving the country.
But experts say the effort is ultimately fruitless.
This is because the policy of artificially preserving the value of the lira in this way will exhaust the banks’ foreign exchange reserves in the long run.
All of this is happening in a country full of potential for economic growth.
According to observers, Turkey has managed the Covid-19 Coronavirus epidemic better than most European countries.
As the country’s economy grew by 1.8 percent last year, which is a great achievement for a country that relies heavily on its revenues from the tourism industry that has been destroyed by the Coronavirus.
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Before changing the central bank governor, the International Monetary Fund expected Turkey’s growth rate to reach 6% this year, and this figure will undoubtedly need an adjustment in light of recent developments.
The Turkish economy is dynamic and resilient. If Sahap Kavcioglu succeeds in handling the recent developments, we will see the return of the great optimism that was a month ago.
