Erdogan goes high-voltage with another rate cut

Erdogan goes high-voltage with another rate cut
By Akin Nazli in Belgrade October 21, 2021

There are no shocks anymore when it comes to Turkey’s central bank—such has been its wayward behaviour under the sway of President Recep Tayyip Erdogan in recent times—but some analysts may have felt a tingle of surprise when its monetary policy committee (MPC) on October 21 announced it was cutting the policy rate by another 200bp to 16% rather than the 50-100bp that most market commentators were expecting. That 200bp comes on top of the 100bp that was announced a month ago—the point at which many observers of Turkey’s monetary policy were finally persuaded that there is no such thing as central bank independence in Ankara.

“Till the end of the year, supply-side transitory factors leave limited room for downward adjustment to the policy rate,” the statement accompanying the latest rate cut read.

This may be a sign that Erdogan’s order for cheaper money has been delivered with two front-loaded moves and that the benchmark rate will end 2021 where it stands now at 16%. However, do not bet the farm on it.

With this latest move, Turkey’s monetary policy dives deeper into uncharted territory. It is not possible to explain the moves made with any kind of market logic. The real sector does not seem too happy either.

Whether Erdogan is aware that conditions are not the same now as they were during his previous rate-cutting cycles is questionable. He may be blithe to the fact that this rate cutting will not bring happiness to any economic actor, ranging from the consumer to the market opportunist.

When one thinks of the period ahead for Turkey, one might well land on the word “hardcore”. The latest lira depreciation, taking the decline against the dollar in the year to date to around 22%, has already pushed the country into a full-blown hyperinflationary process. The new lowering of rates will further enfeeble the local currency, taking it to fresh record lows, and triggering price hikes.

The magnitude of the currency depreciation and whether Turkey can avoid a balance of payments crisis will remain the main focus in the coming period. The latest record for the USD/TRY pair stood at 9.5532 as of 23:00 Istanbul time on October 21 and further slides looked only too possible.

Ten-year domestic government bond yields rose over the 20%-level (Turkey’s domestic government bond market has not been a functioning market for a long time. There are few foreigners around for a hit-and-run).

Five-year credit default swaps (CDS) surpassed the 450-level.

A double-digit figure for the USD/TRY seems a matter of a few working days from now. The feasible limit for the pair is currently found somewhere up in the sky but get ready for something of a U-turn somewhere along the way, likely involving the firing of central bank governor since March Sahap Kavcioglu. Erdogan fired the previous three governors before Kavcioglu within a period of 20 months, why would he stop short of rolling the head of a fourth?

Since October 12, it has been obligatory to submit ID or a passport number when buying or selling FX at exchange offices in Turkey.

Those fishing for a hit-and-run trade idea know that when the Erdogan regime employs a chunky rate cut, it exerts pressure on the USD/TRY. The pair sank below the 9.20-level on October 20.

On October 18, Citi came up with the idea of shorting the TRY/RUB. That does not sound like a bad idea given that the lira will sink in any event and booming energy prices may support the Russian ruble (RUB).

Foreigners’ holdings in Turkish paper, meanwhile, are heading for zero. Shorting the Nasdaq-listed and USD-denominated iShares MSCI Turkey ETF (TUR), the most popular Turkey exchange-traded fund (ETF), has lately become a popular trade.

On the global markets front, the USD index (DXY), which was below the 90-level in May, is testing above the 94-level. Commodity prices are alternately breaking records. Cotton has recently been going well.

The fuss over Turkey ending natural gas import contracts is due to ignorance. Will the Russians keep TurkStream for their grandkids? Blue Stream remains idle. There are two pipelines that run from Azerbaijan. Qatar may take the trouble to send some LNG cargoes.

Urging Turkey to sign some long-term gas contracts amid the Kremlin-triggered “gas crisis” in a bid to blackmail loser Europe over the Nord Stream 2 pipeline is bewildering. It’s similar to raiding market shelves before lockdowns or buying a financial asset when it is breaking all records.

Ignorance is not a crime but how come there is this confidence to counsel Turkey to sign a 30-year take-or-pay contract at $1,000 for 1,000 cubic metres of gas? There are also pundits and “institutions” who advise Turkey on reform. What is reform? Can you find Turkey on the world map?

Back to our business. The Fed is targeting a deceleration of its money printing in November but it will keep printing money thereafter—just at a slower pace. Nevertheless, the global markets will remain unfavourable until the new year rally begins in December. They cannot break records continuously. Some fluctuations need happen.

Booming global inflation coupled with lira depreciation will multiply Turkey’s real inflation, thought to be already hovering in the 40-50% range (the official inflation figure in the 19%s is widely dismissed, even though it is among the highest in the world).

On October 28, the central bank will release its quarterly inflation report and updated end-2021 inflation forecast. The upper limit of the current forecast stands at 16%, well below the market expectation for a figure close to 20%.

On November 3, official inflation for October will be released. Official CPI for September was posted at 19.58%, with the central bank’s formulation of “core inflation” producing 16.98%.

With the latest rate cut, the core story has also gone with the wind. Wish some luck to the mainstream, they have to take the Erdogan regime seriously.

Basic arithmetic suggests Turkey’s official CPI inflation series will suggest sharp rises.

On November 18, the next rates decision will be released.

Big moves in the flow of loans are still not seen. So, why is Erdogan cutting the policy rate? Just one of the rhetorical unexplainables. But some of those headline pundits need to earn their corn. The onus is on them to devise some answers.

For August, the central bank released a current account surplus, if you buy it. As winter is coming, December will bring stronger real outflows in the trade account.

Since 2018, we have been noting that the winter falls hard on Turkey. It becomes harder as each year goes by. The suicide figures alone tell you that.

The price of bread in Istanbul is to be hiked to TRY2.5 from TRY2, marking a 25% hike. Monthly inflation is released at 2%—again, if you buy it.

Price hikes in fertilizers, postal servicesfurniture materials, electricity and fuels (gasolinedieselLPG) have cooked up a perfect storm.

Right now, the Turkish government, famous for collecting eyewatering indirect taxes, literally collects zero tax from fuels as price hikes have eaten up its taxes and all hikes are now directly reflected in the prices.

Diesel fuel is currently more expensive than gasoline in Turkey. Perhaps all Turks are about to go “green” as they won’t be able to afford to do anything else.

At the trade ministry, they’ve banned the export of fertilisers, while exports of chickpeas, ammonium and sulphuric acid are subject to ministerial approval.

On the foreign policy front, it currently seems that Erdogan has managed (after crying a river for about a week, travelling to Sochi to hang out with Vladimir Putin, and so on) grab a photo opportunity with Joe Biden that will take place on the margins of the G20 summit in Rome scheduled for October 30-31.

He is also hankering for some limited military action in Syria. This will be just for the domestic market (when the army crosses the border into the ocean of uncertainties, the Turk shuts their mouth or shall be lynched as a traitor).

As usual, the desired military attraction will be with the tacit permission of Erdogan’s patrons, the White House and the Kremlin (the Russians are well aware of what goes on between dictators Erdogan and Putin, while the Western media audience is fooled with comic references to Turkey falling off a road to “democracy” that it was never on).

If the military action goes ahead, more downward pressure will be applied to already sinking Turkish paper until things settle down. The operation will have no impact in real politics.

If we must meditate on the details, we can see that Erdogan is supposed to pull his troops and jihadists to above the M4 highway in Syria’s Idlib region (across the border from Turkey’s Hatay province). Next, the Russians will bomb the remaining Hayat Tahrir el-Sham (HTS) jihadists in the region. They will push HTS out and take control of the highway, which connects Aleppo to Latakia.

Red: Russians and Assad, Dark Green: HTS, Light Green: Erdogan’s jihadists, Yellow: Kurds under Russia’s patronage.

Erdogan will ask permission to attack the Kurds in exchange. Russia’s proxies speculate that Erdogan will be allowed to invade a very limited symbolic amount of territory. He is asking for consent to an invasion of Tell Rifat, which is under control of the Kurds under the Russians’ patronage.

Back in domestic politics, things are getting tasty. Erdogan is too frail and sick to go on, say some observers. Debates as to how the Erdogan regime will end are 10 a penny.

From the opposition parties to fugitive paramilitary gang leaders, everyone in Turkey has been awaiting political murders. The Erdogan regime has dug itself one hell of a hole. It is only getting deeper and the alternatives that present themselves include staying in power at any cost, fleeing abroad (where could be safe?), or getting intimately introduced to the inside of a prison cell.

Turkey is still able to roll over its foreign debts—but each instance of borrowing at the attendant costs brings the country closer to the ultimate end, namely an economic and political surrender to an IMF programme.

A new version of the ruling AKP party, working under an IMF programme is the likeliest potential major change you might see down the road ahead.

As another option, there are stories of blind ignorant neocons once more encouraging Erdogan’s defence minister Hulusi Akar to stage a coup. It appears that there are ignoramuses who are not even aware that Akar is from Kayseri. Where is Kayseri? What does it mean to be from Kayseri? In short, Akar is not as foolish as an ignorant neocon troll.

Ex-president Abdullah Gul is also from Kayseri. Some other smart Western interlopers for a long time chased up replacing Erdogan with Gul. Gul told them, “Of course”. He said “Of course” to everyone. In the end, he pleased everyone, but no-one. Zero plus zero equalled zero. Kayserers do not take risks. They are good at trade and pleasing everyone.

Prior to Akar, it was interior minister Suleyman Soylu who was to replace Erdogan. We have been arguing that Soylu is a cheap troll and not the most impressive of “operatives”; Sedat “The Botox” Peker, the YouTubing mafia boss on the run and spilling beans about the regime, has wiped the floor with Soylu. Now, Akar is favourite. Gul’s name should not be dismissed entirely.

The comedy is that all these names have absolutely no support among ordinary Turks. The opinion pollsters ask the wrong questions.