Rattled investors flee Turkey

Erdogan wins: will he pick another fight with the central bank?

You wouldn’t think investors have become concerned about Turkey, says Swaha Pattanaik on Breakingviews. When President Recep Tayyip Erdogan won last Sunday’s election, the Turkish lira bounced by almost 3% against the US dollar, and the stockmarket ticked up.

But the reaction reflected “relief that the country had avoided political gridlock”, not an endorsement of an increasingly authoritarian president’s policies. “How much he compromises the independence of the central bank will be fundamental” in Erdogan’s next five-year term, says Marcus Ashworth on Bloomberg View. He has become notorious for picking fights with the bank, always insisting on keeping interest rates low to bolster growth. This has undermined confidence in the bank’s efforts to quell inflation.

It has raised rates by 5% since April, but it may be a case of too little, too late. Prices are rising at an annual rate of 12%, propelled partly by overspending and a government-induced credit boom. Investors fearful of a hard landing have begun to vote with their feet, sending the lira down by a quarter against the greenback in 2018.

Turkey is especially vulnerable to money leaving the country owing to its current-account deficit, which must be plugged with foreign capital. It is in debt to the rest of the world, and much of the debt is in (increasingly expensive) dollars. The International Monetary Fund estimates that Turkey relies on external financing for about 25% of its national income, notes Ashworth.

So as rattled investors flee, they make a nasty recession all the more likely. Of course, Erdogan could suddenly learn to stop interfering in the economy. But it’s not the way to bet – and it may be too late now anyway.

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