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The Turkish economy seems to be facing the perfect storm since huge capital outflows from the country have been registered since yesterday and now it is very likely that the support it can find in known allies will not be enough for Recep Tayyip Erdogan.
“Unless foreign powers like China or Qatar decide to buy … Turkey,” says a London-based analyst who has been following developments closely for the past few hours.
According to him, April and May are two very critical months for the future of the Turkish economy, as Turkish banks will have to repay foreign currency loans of more than $ 7 billion (88 billion in total in 2021). Which means that if the pressure on the Turkish pound continues in the coming weeks, it is not ruled out that there may even be an “accident”.
Erdogan’s strategy is to cut interest rates during the year to trigger a credit crisis in 2022 and go to the 2023 elections with the economy galloping. The question is whether it will be successful …
The extensions of yesterday’s “collapse” are not only insignificant. In one day, Turkish citizens were impoverished by about 8%, and this is because great efforts were made to support the British pound. In initial trading for the week, the Turkish pound fell to 17.5% against the dollar.
At the same time, Turkey’s borrowing costs soared 38% in a matter of hours. On Friday, the Turkish government could borrow at an interest rate of 13.6% for 10 years and as of today it has to pay an interest rate of 18.8%, which is the highest in the world (surpassing Uganda) . In comparison, the cost of financing other large emerging economies (Brazil, Russia, India, etc.) ranges from 6% to 8%.
All this is happening in the wake of the new, third in the last three years, removal of a central banker by Erdogan. The solution was given by the former Minister of Finance and current leader of the Democracy and Progress Party, Ali Babacan, who proposed that Erdogan himself assume the functions of central banker so that we can finish …
For the third time since the summer of 2018, the Turkish economy is facing a currency crisis. In the previous two, Erdogan … turned the boat around at the last minute, allowing interest rates to rise. Every time he didn’t really believe in what he was doing, but was forced to do it, the costs were higher and the benefits short-lived. Today the markets do not expect another turn and an increase in interest rates.
The pound will continue to fall, most analysts estimate, as they expect the Turkish president to do everything in his power to throw hot money into the economy in the run-up to the 2023 elections. 7%.
Turkey’s economic growth is highly dependent on capital inflows into the country and access to cheap sources of finance. But for hot money to fall into the market, interest rates must be lowered.
Is it possible that there are negative interest rates everywhere and in Turkey they are at 19%? This is Erdogan’s doctrine, but with inflation above 15%, markets expect interest rate hikes like the one Nachi Abal decided last Thursday, which led to his “beheading”, not cuts.
Today, the central bank cannot support the Turkish pound, as its net foreign exchange reserves do not exceed $ 11 billion, according to Capital Economics.
Therefore, Turkish banks will have to buy dollars to repay their foreign currency loans, which will put further pressure on the British pound, reduce bank balances and tighten credit conditions.
Result of all this? Investors are looking for ways to escape Turkey, believing that it will be very difficult for Erdogan to find an ace up his sleeve as problems are mounting. A characteristic of the market perception of the Turkish president and his intentions is the fact that even before the removal of the central banker, investment firms predicted that Turkey would experience a new currency crisis before the 2023 elections.
Agbal was quick to restore Turkey’s monetary discipline and the country’s relations with the markets. Investors were beginning to believe that the CBRT would control inflation during a long period of high interest rates, while the cheap currency would boost exports and help change the direction of the Turkish economy. Why didn’t Erdogan do all this? Because growth would be affected and it would go to the polls at a rate close to 3%.
With Erdogan returning to “Erdoganomics”, all possibilities are possible. The truth is that the Turkish president will play everything for the next two years and will try by all means to provoke an explosion of development.
