Turkey has managed to combine a 19% interest-rate with a plunging Lira and other markets

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by Shaun Richards

The weekend just gone saw some extraordinary moves in Turkey.

Ankara dismissed the head of the Central Bank of the Republic of Turkey’s (CBRT), Naci Ağbal, and replaced him with professor Şahap Kavcıoğlu, according to a presidential decree published Saturday in the Official Gazette. ( Daily Sabah)

The departing Governor got the message that discretion was going to be the better part of valour.

Shortly after the announcement, Ağbal thanked President Recep Tayyip Erdoğan for his appointment to the post, despite his short tenure.

“I would like to thank Mr. President for all the positions he has appointed me to, including the governorship of the central bank. I would like to express my gratitude over my dismissal today. I hope it will all be for the best,” Ağbal wrote on Twitter. ( Daily Sabah)

What had he done that merited a sacking at the weekend? Well we find the answer to that on the website of the central bank or TCMB from Thursday.

The Monetary Policy Committee (MPC) has decided to increase the policy rate (one-week repo auction rate) from 17 percent to 19 percent.

The 2% interest-rate increase came with a promise of more if necessary.

The tight monetary policy stance will be maintained decisively, taking into account the end-2021 forecast target, for an extended period until strong indicators point to a permanent fall in inflation and price stability. In regard to the indicators pointing to a permanent fall in inflation and price stability, indicators for the underlying trend of inflation and pricing behavior, diffusion indices, demand and cost factors, and inflation expectations will continue to be monitored closely for their compatibility with the targets in the forecast horizon. Additional monetary tightening will be delivered if needed.

So we saw some old fashioned central banking with interest-rates being raised to combat inflation. This continued a trend which was bearing some fruit.

Since Ağbal’s appointment on Nov. 7, the lira had rebounded more than 15% from a record low beyond 8.50 to the dollar. Some $20 billion (TL 144.38 billion) in foreign funds also trickled into Turkish assets. ( Daily Sabah)

That will teach him to raise interest-rates……

Where did it go wrong?

Those who have followed the Turkish saga will remember a rather extraordinary statement from President Erdogan when he claimed high interest-rates cause inflation. Well in late January he was mining the same theme.

“Dear friends, I am absolutely against high interest rates,” Erdogan told businesspeople in Ankara.

Now why he appointed someone who was going to raise interest-rates may remain a mystery, perhaps it was hoped to be a quick fix?

If only we had known that an article praising the Governor was about to be published by The Economist!

In only a few months as Turkey’s central­-bank governor, Naci Agbal, has breathed new life into his country’s currency and bolstered the bank’s reputation

Sadly for us but especially for The Economist they managed to release this an hour after it become known he was departing. So too late for those who use The Economist as a reverse indicator a role at which it had yet again established strong credentials.

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Another Currency Plunge

Last night as markets began to open for the week there were obvious issues.

It is too soon to see how markets have reacted to Ağbal’s firing, but the Turkish lira was already being traded at a rate of 8.3575 to the dollar when markets in Asia began opening on Monday.  ( Ahval)

The atmosphere was further confused by the finance minister talking about a commitment to free markets when expectations were for this.

Eurasia Group and other analysts predict that the Turkish government will likely intervene heavily in currency markets to prevent large capital outflows from occurring.  ( Ahval)

It seems likely  the latter is in play as the Lira has improved to 7.9 versus the US Dollar as I type this.

If we switch to the bond market it too has had a rough day. The benchmark ten-year yield is 17.26% or up 3.6% today. I guess that puts the US ten-year yield worries in perspective as  today’s move is around double it. There will be even worse issues for bonds denominated in US Dollars with effects from yields and indeed the currency.

Then there is the stock market.

The Istanbul stock exchange briefly suspended trading on Monday after its main index fell by more than six percent………The Borsa Istanbul said its automatic circuit breakers were triggered at 9:55 am. Trading resumed at 10:30 am but could be halted again should the slide continue. ( Middle East Eye)

As I type this the BIST-100 index is 125 points or over 8% lower at 1403.

The Economy

Here we have been told that things have gone well.

Turkey has quite a resilient economy and it tends to rapidly recover from the shocks, a leading economist at the European Bank for Reconstruction and Development told Anadolu Agency on March 16……….Noting that Turkey was one of the very few countries in the world to record positive growth throughout the last year, Kelly said comprehensive fiscal incentives were instrumental in the growth. ( Huriyet Daily News)

Indeed he went further.

Noting they are in the process of updating their forecasts, he said: “I cannot give any precise figures, but if the current tight monetary stance is maintained, I would expect Turkey’s economy to grow around 4% to 5% this year, and around 4% in 2022.”

The problem here is how much you believe that. Starting with those that do there is the issue of the hangover where interest-rates were raised to 19% to try to deal with the inflationary consequences. Those less sure might like to note the unemployment figures.

Turkey’s unemployment rate dropped by 0.5 percentage points to 13.2% in 2020, the country’s statistical authority said on Monday.

Last year, the number of unemployed people was 4.08 million, down from 4.4 million in 2019, TurkStat figures showed.

Meanwhile, the number of unemployed people — aged 15 and over — was 4.06 million last year, down from 4.4 million in 2019. ( aa.com)

That too looks good in the circumstances but some are not so sure.

The new dataset, which contains the country’s labor statistics for January, reveals a gap of about 17 percentage points between the official unemployment rate and the one based on a broader and more realistic definition of unemployment, which stands at more than 30%. ( Al-Monitor)

Interestingly Eurostat seems to have been on the case because as of the third quarter of last year they were recording an unemployment rate of 24.4%.

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There is a high in the official series because the employment rate looks very low and it has been getting worse.

The number of employed people — aged 15 years old and over — was 26.8 million, thus employment rate was 42.8% in 2020, down 2.9 percentage points.


Some of this is pure will of the wisp stuff as markets rise and fall. But even with that care is needed because the moves we have seen today are of such size that there will have been large losses in places. Also Turkish businesses which borrow in overseas currencies look like the price just got higher. This is a substantial issue.

Turkey‘s short-term external debt stock – debt that must be paid in the next 12 months – reached $140.3 billion in January, according to official data on March 17……Nearly half of the debt stock was in U.S. dollars – 43.9%, followed by 27.3% in euros, 13.9% in Turkish liras, and 14.9% in other currencies. ( Hurriyet)

As I look at events I see that there seems to be a cap on the Turkish Lira at 8 versus the US Dollar so that seems to be the foreign exchange intervention level. According to Trading Economics the level of reserves is shown below.

Foreign Exchange Reserves in Turkey decreased to 52660 USD Million in March 12 from 53250 USD Million in the previous week

However those are gross reserves and the net issue ( allowing for swaps and borrowing) is worse. Some argue you have to take 10 billion off and a few suggest that the number may now be negative.

In the supporting cast is the fact that interest-rates are still 19% but it would be wise for players to lock that in as it seems unlikely to last. Or rather it would have to be forced on the central bank now. If we switch to the issue of inflation we see that Turkish workers and consumers seem set to be hit again. Last year’s growth figures relied on the inflation numbers which are especially open to doubt in the circumstances.

It was only last week I noted this about the Spanish bank BBVA.

In 2020, Garanti accounted for 8.1% of total BBVA Group assets, while its €563 million contribution to BBVA Group net profit represented 14.3% of total profit generated by the Group’s business areas as a whole (€3.9 billion), excluding the corporate centre.



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