Not unexpected commentary from Turkey’s finance minister, Nebati, over the past 24h to say that Erdogan will not move to hike policy rates after the election.
Some might say that this is just electioneering, and obviously no politician would warn that they are about to hike policy rates this side of an election.
However, I think Nebati and Erdogan really mean it.
Indeed, if Erdogan wins in May he will view it as a vindication of his low interest rate policy – even though that has been central to persistent high inflation in Turkey.
But if Erdogan wins the battle lines will be drawn around the currency. The CBRT has used foreign money – from Russia and the Gulf – to anchor the lira nominally this side of elections. With high inflation, and now massive minimum wage and public sector wage hikes, that has left Turkish industry struggling to compete. The lira will very likely have to adjust post election whoever wins. Likely the sell off will be larger on an Erdogan win as I cannot see foreign portfolio inflows returning in any scenario but an opposition win. That means either the CBRT will have to reset the lira, in an attempted one off devaluation, much weaker or it will have to go back to the palace yet again to ask Erdogan to hike rates – or Turkey gets more foreign bailouts from Russia and the Gulf.
On the latter in terms of Gulf money what we have seen from Saudi/UAE financial backing in recent years for the likes of Egypt, Bahrain Tunisia and Pakistan is they will lend but will call for orthodox policy solutions – either anchored by an IMF programme (Egypt, Pakistan, Tunisia) of domestically constructed reform programmes (Bahrain, maybe Oman). The line from the Gulf is that while we will give, we want to be paid back and require then the right macro and investment environment – that has meant a competitive exchange rate in the case of Egypt and orthodox monetary policy to boot, and across the piste market friendly fiscal and structural reforms.
Assuming Erdogan wins I think the Gulf states will then crack the whip on Erdogan to force some kind of economic policy orthodoxy. I cannot see Erdogan ever going to the IMF, so if there is an economic policy adjustment more likely it will be like Bahrain or Oman – albeit neither of these latter two moved from their FX pegs, so the case with Turkey is different, more akin to Egypt, ex the IMF. Doing all this without the backstop of an IMF programme just makes it all a lot more difficult.
Will Erdogan submit?
Likely not initially as his low interest views are a matter of faith/principal. I think it is based ultimately on his religious opposition to usury.
But I guess it depends post election what level of pressure is exerted on the lira and how that risks broader macro financial stability, or more likely instability. Eventually likely rates will have to go higher but the question is how much macro financial damage is done in the interim and before the penny, or lira, drops.
Clearly Erdogan will not jack up policy rates the week after election – which could well be the case with an opposition win. But he may eventually be forced to follow suit.
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