Erdogan blames Turkey’s currency woes on ‘foreign financial tools’ as central bank reserves fall

People shopping in the local market in Istanbul, Turkey on December 5, 2021. The depreciation of the Turkish lira has weakened the purchasing power of citizens.

Erhan Demirtas | NurPhoto via Getty Images

Turkish President Recep Tayyip Erdogan has pledged to curb his country’s spike in inflation, which hit 36% in December, as the country’s central bank prepares for another rate-setting meeting next week .

Speaking in parliament on Wednesday, Erdogan said he was protecting the country’s economy from attacks by “foreign financial tools that can disrupt the financial system,” according to a Reuters translation.

“The rising inflation is not in line with the realities of our country,” added the president, swearing that the government measures recently announced to support the strongly weakened pound would soon tame the “unfair” price increases.

Economists who commented on the news were not impressed.

“Fuller, more comprehensive garbage from Erdogan,” wrote Timothy Ash, emerging markets strategist at Bluebay Asset Management, in an email note shortly after the speech.

“Foreign institutional investors don’t want to invest in Turkey because of the absolutely crazy monetary policy parameters imposed by Erdogan,” he wrote. “There is NO foreign plot.”

The Turkish lira lost 44% of its value in 2021, largely due to the refusal of the president – who essentially controls the levers of the Turkish central bank – to raise interest rates to curb inflation. And the Turks themselves are looking beyond reading it as they lose hope in their own currency: Turkish stores are now starting to display prices in US dollars, and Turks are investing their money in cryptocurrencies like bitcoin and ether.

“If RTE [Recep Tayyip Erdogan] wants to save the lira, and maybe his own skin, he should adopt a dollar-based currency board, “Johns Hopkins University economist Steve Hanke wrote on Twitter Wednesday, saying Turkey” spontaneously dollarises “.

His tweet featured an article from the Israeli daily Haaretz titled “Even Turkish Lira Stopped Believing in Erdogan.”

Decline in central bank reserves

An avowed opponent of interest rates, Erdogan instead described an alternative package of measures to support the lira. The plan is essentially to protect local depositors against market volatility by paying them the difference if the decline in the lira against hard currencies exceeds the banks’ interest rates.

Critics say this plan is unsustainable and is essentially a big hidden interest rate hike. And central bank reserves are already falling: Gross central bank reserves declined from $ 1.6 billion to $ 109.4 billion in the first week of January, according to Goldman Sachs, “in due to the decline in foreign exchange reserves, which amounted to $ 71.0 billion. “

State monetary interventions, spending dollars to buy lira in order to stabilize it, have been costly.

The lira appeared to be in free fall in mid-December, dropping to as low as 18 per dollar before the government announced its bailout. The intervention was successful in bringing the currency down to just under 14 per dollar and remaining stable there over the past week, although it was a dramatic drop from its 7 per dollar level. just over a year ago.

The picture is not entirely gloomy: Turkey posted positive figures for industrial production and retail sales in November, which “suggests that the Turkish economy held up well at the onset of the currency crisis”, wrote Jason Tuvey, Senior Emerging Markets Economist at Capital. Economy.

“But we doubt this force will last much longer as the most pernicious effects created by the very steep declines in the lira in December are being felt,” Tuvey added.

“While export sectors may hold up well, consumer-driven ones will suffer from a surge in inflation, which reached 36.1% year-on-year in December and is expected to rise further.”

How long can this last?

Analysts estimate Turkey’s short-term debt to be just over $ 180 billion, with a current account deficit of around $ 10 billion to $ 20 billion, leaving gross external financing needs at around $ 200 billion. . With gross central bank reserves of around $ 109 billion and likely to continue to decline with dollarization, spending to support the pound, and the potential flight of foreign capital, funding for this foreign exchange reserve hedge does not appear to be. not very solid.

So how long can the central bank continue to intervene to support the lira? “The response is not very long if it continues to maintain the pace of intervention observed in December, which recalled having kept the reading flat only over the month,” Ash wrote.

Meanwhile, Erdogan continues to push his own economic theories, insisting on Wednesday that the link between interest rates and inflation has long been overlooked in some other countries – a comment that some critics say would compare the Turkey to Argentina, Venezuela or Iran in terms of monetary policy. Politics.

“I’m worried now about messages to foreign investors,” Ash wrote.

Erdogan tells the world that Turkey does not need foreign capital, that foreign portfolio investors are not welcome and that Turks can finance their own economy. His economic policy mantra is already unappreciated. .. I think investors are wondering why they should continue to fund the bad policies of the Erdogan administration? Will any new issuance of money just disappear in ineffective and silly intervention in the forex market, and the Turkey heading for a systemic crisis? “

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