March 22, 2021


TURKEY: Policy continuity (for now)

BY Wolfango Piccoli

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( 4 mins)

The Turkish authorities are busy seeking to reassure investors after the unexpected change of leadership at the top of the Central Bank (TCMB). Yesterday (21 March), the newly appointed Governor Sahap Kavcioglu indicated that the fight against inflation remains a priority and, critically, that the meeting on the Monetary Policy Committee would be held as planned on 15 April, appearing to rule out any immediate cut to interest rates. In a belated statement earlier today, Finance Minister Lufti Elvan pledged to adhere to price stability and free market principles.

Given the market volatility, Turkey’s large external financing needs and the lack of meaningful FX reserves, policy continuity (the key policy rate remains the one-week repo and is maintained at the current level of 19%) is likely to prevail until the 15 April MPC meeting. Meanwhile, the authorities seem to have “set” the first line of defence at around 8 Turkish Lira per USD. Just like in past critical junctures, the CEOs of Turkey’s private and public banks are likely to be under intense pressure from the presidential palace to support the TCMB’s efforts to stabilize the exchange rate.

Predictably, noise (coming solely from outside Turkey) about capital controls is back. As we stressed in the past, outright capital controls are far too politically toxic in the Turkish context; this is true even for President Tayyip Erdogan’s regime. While a combination of regulatory and other measures to limit currency volatility are possible (done in August 2028 and also in early 2020), outright capital controls are not politically feasible (not to mention that they would not be a solution and, in the best case scenario, would only allow the authorities to gain some time). Capitulation, meaning raising interest rates (and possibly appointing a more credible TCMB governor), would be the likely course adopted if the authorities find themselves facing a financial meltdown.

AKP congress next

An important signpost this week will be the seventh congress of Erdogan’s Justice and Development Party (AKP) that will take place on 24 March in Ankara. A cabinet reshuffle is widely expected to be announced before or after the congress. It is unclear whether Finance Minister Lufti Elvan will keep his post. In this regard, it is also worth noting that there have been significant frictions between Lutfi Elvan and Erdogan’s economic advisers during the preparation of the recently-announced (pointless) economic reform plan. Erdogan’s advisor Professor Erisah Arican – a figure very close to former Finance Minister Berat Albayrak – was heavily involved in this tussle.

As for Albayrak, it is doubtful that he will be reappointed in the cabinet or at the top of the AKP in the short run. Noise about Albayrak’s political “rehabilitation” seems to have been emanating almost exclusively from individuals and outlets close to him. While Erdogan has defended in a few recent occasions the performance in office of his son-in-law, he has done it when the government was under intense pressure from opposition parties calling for an investigation of what happened to Turkey’s FX reserves during Albayrak’s tenure as finance minister. It is also worth noting that within the AKP, Albayrak never enjoyed any significant support. Despite the lack of an official position, Albayrak’s cabal is still powerful and well spread within Turkey’s state apparatus, as most recently indicated by Kavcioglu’s appointment.

The sacking of Governor Naci Agbal is a biggest mistake by Erdogan since his decision to push for a re-run of Istanbul’s mayoral elections in 2019, which resulted in a stinging defeat for the president and his AKP. Looking ahead, policy-making is set to remain highly unpredictable and erratic as Erdogan is increasingly distant from reality (and encircled solely by sycophantic advisors and ministers) and insecure about his ability to maintain power in the long run.

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