Turkey’s new central bank governor tried to calm markets on Sunday as investors prepared for turbulence following the president’s abrupt resignation of his predecessor.
Accept Tayyip Erdogan.
Sahap Kavcioglu,
The former deputy of Erdogan’s Justice and Development Party, who was appointed to the post last Friday, said the bank’s main goal was to permanently reduce inflation.
In his presentation, Mr. Kavcioglu stressed the importance of fighting inflation as it contributes to macroeconomic stability by lowering the cost of borrowing and lowering country risk premia, thus creating the conditions for sustainable growth.
The change in power at the central bank – which raised interest rates again the next day – has worried economists and investors about the development of the economy in Turkey, which has ambitions to become a global power with influence in the Middle East, Europe and elsewhere.
The previous governor, Nasi Agbal, who was appointed in November last year, repeatedly raised interest rates in an attempt to control inflation. His resignation raised fears that his successor would tighten monetary policy less aggressively.
Kavcioglu, who worked as a columnist for a pro-government daily, has openly supported Erdogan’s preference for lower interest rates.
Economists expect the value of the Turkish lira to fall sharply when markets open Monday morning, as investors reduce their exposure to Turkish assets until the likely direction of policy is clearer. The lira fell more than 12% against the dollar in early trade, according to FactSet.
This will cause chaos in the Turkish economy. You’ll see tomorrow morning when the markets open, said Durmus Yilmaz, a former governor of Turkey’s central bank and now a deputy of the centrist opposition party Iyi.
A sharp decline in Turkey’s currency will lead to higher inflation, increase the cost of imported goods, especially oil, and have a negative impact on the living standards of ordinary Turks, economists warn.
It’s really mysterious. It makes no economic sense, said Refet Gurkaynak, a leading Turkish economist at Bilkent University in Ankara, referring to Agbal’s resignation.
Mr. Agbal’s resignation marks the third time in less than two years that Mr. Erdogan has replaced a central bank governor. Before the bank chief’s demise, the Turkish economy was already struggling with a coronavirus pandemic that wiped out tourism and slowed international trade, as well as a currency crisis that began in 2018.
Nachi Agbal, who was replaced as head of the central bank on Friday, has repeatedly raised interest rates to keep inflation under control.
Photo:
Umit Bektas/Reuters
Changes are also occurring as Erdogan has expanded his power in the Turkish political and economic system and asserted Turkey’s influence abroad by intervening in the wars in Syria, Libya and the Caucasus region in recent years.
In Turkey, the government is also stepping up pressure on some of Mr Erdogan’s opponents. Last week, a senior prosecutor in Ankara called for the banning of one of Turkey’s largest political parties, the left-wing People’s Democratic Party, accusing the government of maintaining ties with a Kurdish militant group banned as a terrorist organization.
Using the same decrees he used to fire Mr. Agbal, Mr. Erdogan withdrew Turkey from an international treaty known as the Istanbul Convention to Combat Violence Against Women, prompting criticism from women’s groups and rebuke from President Biden. Biden called the decision a disappointing setback for the international movement to end violence against women worldwide.
After years of erratic policies, Mr. Agbal’s tenure has inspired confidence among foreign investors. When Mr. Agbal began raising interest rates last year, investors reinvested a net $4.6 billion in Turkish lira assets. Turkey continues to rely on foreign resources to finance its current account deficit.
As a result, Mr. Agbal’s impeachment took investors and economists by surprise. The last interest rate increase was on the 18th. This happened in March, when the bank raised the key interest rate from 17% to 19%, leading to a sharp rise in the lira’s exchange rate.
The rate hike put Mr. Agbal at odds with Mr. Erdogan, who has repeatedly expressed his preference for low interest rates and unorthodoxly believes that high rates lead to inflation. I don’t think my country can develop with high interest rates, he said in a speech to a business group in January.
The new central bank governor, Kavcioglu, also criticized the interest rate hike in the columns of his newspaper, raising fears among investors that he would change Agbal’s policy.
It’s a disappointment because many people, including myself, thought there would be an inflation cap and that now seems much less likely, said Kieran Curtis, emerging markets fund manager at Aberdeen Standard Investments.
The unexpected changes in the central bank have also sparked fears among some ordinary Turkish citizens who are concerned about the country’s economic and political development.
In general, there is a problem of stability in the country, said Cihan Ilter, 35, manager of two restaurants in Istanbul.
This was not the case in the past. We have felt the effects of these economic decisions at a higher level, perhaps in a year or more. But now that the Turkish economy is very fragile, we are feeling the effects immediately, he said.
The decision is also likely to have a long-term effect on confidence in Turkey’s central bank, making it difficult to address concerns about rising inflation and price stability, said Maya Senussi, senior economist at Oxford Economics University.
Under Mr. Agbal’s predecessor,
Murat Uysal,
Favorable credit rates to stimulate growth have led to gaping holes in the country’s current account as Turkish companies and households imported more than they exported.
Concerns about the current account deficit and interest rates below inflation in the first 10 months of 2020 forced foreign investors to withdraw a net $13.4 billion in local currency bonds and equities.
Capital flight has accelerated the fall of the lira. To buy the lira, the central bank decided to sell foreign currency from its own reserves and from dollars borrowed from domestic banks.
Like many others, I am dumbfounded, said Erik Meyersson, senior economist at Swedish bank Handelsbanken. Calling Agbal will bring investors back, and that’s pretty unusual. Today, these portfolio flows are likely to be reversed.
Email Jared Malsin at [email protected] and Caitlin Ostroff at [email protected].
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