Erdogan blames Turkey’s currency woes on “foreign financial tools” as central bank reserves plummet

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 could disrupt the financial system”, according to a Reuters translation.

“Galloping inflation is not in line with the realities of our country,” the president added, promising that recently announced government measures to support the heavily weakened lira would soon tame “unfair” price hikes.

Economists who commented on the news were not impressed.

“Further, utter garbage from Erdogan,” Timothy Ash, emerging markets strategist at Bluebay Asset Management, wrote in an emailed 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 its own skin, it should adopt a USD-based currency board,” Steve Hanke, an economist at Johns Hopkins University, wrote on Twitter on Wednesday, saying that Turkey “ spontaneously dollarizes”.

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

Decline in central bank reserves

The picture is not entirely bleak: 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 strength will last much longer as the most pernicious effects created by the very sharp falls in the lira in December are felt,” Tuvey added.

“While export-oriented sectors may hold up well, consumer-oriented ones will suffer from a surge in inflation, which hit 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 isn’t very long if it continues to maintain the pace of intervention seen in December, which, it will be recalled, only kept the lira flat during 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 worry now about the messages to foreign investors,” Ash wrote.

“Erdogan is telling the world that Turkey does not need foreign capital, foreign portfolio investors are not welcome and that Turks can finance their own economy. His economic policy mantra is already not appreciated… I think investors are wondering why they should continue to fund the bad policies of the Erdogan administration, will any new currency issuance disappear in inefficient and foolish foreign exchange intervention, and is Turkey heading- it towards a systemic crisis?

Sharon P. Juarez