Turkey’s economic credibility is shot says Erdogan’s former economy czar

Turkey’s economic credibility is shot says Erdogan’s former economy czar
Babacan has made his second attack on Turkey's "credibility" in the space of a week. / https://alibabacan.com.tr/gallery/detail/44
By bne IntelIiNews June 12, 2020

Turkey must restore its economic credibility if it hopes to secure the foreign funding it requires and return to growth, President Recep Tayyip Erdogan’s former economy czar Ali Babacan, who lately founded his own party to take on his old ally, has said.

It is the second attack on Turkey’s lack of “credibility” that Babacan, heading up the Deva (Remedy) Party, has launched this week—on June 9 the 53-year-old ex-deputy prime minister picked up on previous concerns expressed by other opposition politicians and analysts about the reliability of the official data issued by the Turkish Statistical Institute (TUIK), noting that there was “undeniable” political pressure on government institutions and stating: “Turkey needs to regain its reputation. In the past, people did not doubt the reliability of official figures.”

Babacan, who resigned from Erdogan’s Justice & Development Party (AKP) last July over “deep differences” about the direction of the party he helped found, said in an interview with Reuters that Turkey risks another slump in the Turkish lira unless it can access fresh sources of foreign exchange. Trust in the country’s economic institutions had eroded, he said.

Running monetary policy

Erdogan, who has been at the helm in Turkey for 17 years, is often accused of more or less single-handedly running the country’s monetary policy. Last year, he sacked the central bank governor after growing disgruntled at his failure to quickly deliver interest rate cuts. Since then the regulator has aggressively slashed the benchmark rate by a cumulative 1,575bp to 8.25%, below annual inflation of 11.39%. It has also burnt through billions in FX reserves to defend the lira, meaning bringing in more foreign funding has become a somewhat urgent matter for Ankara.

“Turkey must find that forex soon,” said Babacan, adding that it needs to “reinstate the reputation and confidence in its economy management first”.

Reiterating the view that the country’s institutions have already “lost their credibility”, he added: “You can dictate onion prices... but you cannot dictate the foreign exchange price, that’s not how the markets work.”

Though he is at least getting a hearing for his case in foreign media, Babacan is not thought to have attracted more than 1% or 2% support for his Deva party among the electorate. Yet even incremental gains for Deva could spell trouble for Erdogan, whose AKP rules in a coalition with the ultra-nationalist Nationalist Movement Party (MHP). Babacan said it was unlikely Erdogan’s government would last until the next scheduled general election in 2023, adding that he expected a snap poll next year or in 2022.

“Shades of grey”

Investors and bankers have concluded that Turkey would only adopt stark capital controls in a worst-case scenario. But Babacan said in his interview that the Erdogan administration was already heading in that direction. “Capital controls is not a black and white area, it consists of shades of grey. Turkey is going towards a darker grey,” he said.

An indication of Turkey’s present difficulties in attracting foreign capital inflows came earlier this week when Turkish finance minister Berat Albayrak attempted to announce with great fanfare that after eight years of talks Ankara was joining Euroclear Bank, one of Europe’s largest central securities depositories, enabling foreign investors to settle trades in the Turkish government debt market.

Charles Robertson, chief economist at Renaissance Capital in London, greeted the announcement of the Euroclear deal by telling the Financial Times that Turkey has become an irrelevance for many fund managers, remarking: “I just find it easier to encourage investors to look almost anywhere else.”

There is also growing nervousness in Turkey over what the fate of the country’s democracy under the Erdogan regime might be should the Turkish economy continue to slide into the mire. On June 4, in an article addressing Turkey’s relative success in tackling its coronavirus (COVID-19) outbreak—the strategy was helped by the fact that the country has a particularly young population and few of its old people live in care homes—The Economist addressed the political situation under the Erdogan regime, observing: “Mr Erdogan muzzles the media, locks up critics and flouts some of the most basic norms of democracy. But there is another reason why he and his ruling AK party have not lost a general election in almost two decades. As even its critics acknowledge, AK works hard and gets things done. If opposition parties were ever to take power—and whether Mr Erdogan would allow such a thing is the biggest unspoken question in Turkish politics—they would have to prove they can work just as hard.”

‘Growing risk of intervention’

In further observations on the government’s struggle to keep the economy on the rails, Fitch Ratings last month flagged the growing risk of government intervention in the banking system as it seeks to shore up its external finances. Such a move could hinder the ability of the country’s banks to service their foreign currency obligations.

Turkey has around $80bn in short-term FX debt coming due between now and the first quarter of 2021, according to Filippo Alloatti, senior analyst at Hermes Investment Management, who told Reuters that the rollover process would not be easy but could eventually be done.

The news agency also ran notes from Uday Patnaik, head of emerging market debt, Legal & General Investment Management, which is underweight Turkey. “The issue around Turkey is not really per se the sovereign itself but it’s the impact of all the short-term loans in the banking sector [that] would potentially have on the sovereign. It is something that is concerning us,”

“In the unlikely event that Turkish banks are not able to roll over their loans, this could create pressures within the banking system and on central bank FX reserves, if there is a need to provide foreign exchange,” he said.

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