High inflation, mistrust in government keeps Turks in FX

Turkish President Tayyip Erdogan’s promise of a new economic era triggered a foreign-driven rally in the lira, but local investors have yet to be persuaded that policies they say have dragged on economic prospects for years will be reversed.  The raging epidemic and wide-spread skepticism about state-published data on Covid-19 cases, inflation and Central Bank FX reserves further reduces local’s desire to convert their FX holdings to TL.


Interviews with local portfolio managers, gold sellers and business owners suggest Erdogan’s biggest challenge will be convincing Turkish individuals and companies he can turn last month’s rhetoric of market-friendly reforms into reality.


“There is a protective reflex”, built up after years of lira depreciation, said Baris Hocaoglu, general manager of Istanbul Portfoy, which manages 7 billion lira ($900 million) of assets and recommends a “cautious stance” to clients.


“Until the trust and stability are established, especially individual investors’ interest in gold and foreign exchange (FX) will continue.”


Local wariness also reflects other risks, including the resurgent coronavirus pandemic and signs of friction within Erdogan’s government that could worsen.  According to Health Ministry, Turkey is diagnosing 30K new corona cases over the last week, but a new statement by Turkish Medical Association claims the reality is 60K cases.   Two surveys  conducted over the summer reveal that participants have deep misgiving about the accuracy of Turkstat data on inflation and unemployment.



Early last month, convinced by allies his economic policies were failing, Erdogan installed a new central bank chief who hiked interest rates to 15% to boost the record-low currency.


Foreign investors, who hold only 5% of Turkish bonds, then chased some of the highest yields in emerging markets, pushing the lira 12% higher. That rally was partially reversed by Turks, who still face negligible deposit rates, buying $4 billion of gold and foreign exchange in two weeks.


Locals could warm to the lira if deposit rates are pulled higher by further monetary tightening, analysts say.  Atilla Yesilada, an advisor to Global Source Partners asserts that Turkstat must come claim on the true rate of inflation and Central Bank ought to set rates policy based on the new stats.  Yesterday, Istanbul Chamber of Commerce released its cost of living index, which rose 1.94% MoM to  reach 14.07% YoY.  Turkstat will release official CPI and PPI data tomorrow.


Bankers say that for the first time in five years some Turkish energy importers are requesting market quotes for dollars and euros, while at Istanbul’s Grand Bazaar gold coins and jewellery are selling at $3 above international prices.


Mehmet Ali Yildirimturk, deputy head of a city gold shops association who operates at the Bazaar, said only “concrete actions” from the government will win trust. “Until then the local investor is still interested in physical gold,” he said.




A growing reason for caution is the coronavirus surge that has closed the doors to restaurants and schools, leaving people out of work as they were in a spring lockdown.


On Monday, Erdogan announced curfews and said the government is taking careful steps to avoid “a full-blown economic and social crisis”. Yet some in the vast small-business services sector see more signs of mismanagement.


“We are facing unjust competition and don’t have the big budgets like supermarkets Metro, Migros, Carrefour,” said Oktay Dagasan, 42, who runs a small Istanbul liquor shop that must now close early.


“We are finished economically and buried under credit card and loan debt,” he said. The government should give tax and rent support and “come out among the people and see what it is like,” he added.


In an interview, Numan Kurtulmus, deputy chair of Erdogan’s ruling AK Party (AKP), said high unemployment and current account deficits will be solved as part of the new approach but it would take time.


“We will have a difficult period ahead of us, especially because of the pandemic,” he said last week.


The AKP has slipped in opinion polls and one of its founding members resigned from a key post at the presidency last month after his calls for judicial reform were rejected by Erdogan and the leader of his nationalist coalition partner.  According Avrasya survey agency November poll, AKP and its partner MHP’s raw votes decliend to 26% and 6.7%, respectively, with the CHP-IYIP-SP garnering 32%.


Some analysts say risks of an early election have risen along with prospects of economic sanctions, given a row with the European Union over territorial waters and expectations of tougher U.S. bilateral ties under a Joe Biden White House.


“The public closely follows the ongoing political conflict in Ankara, and senses that the end might be an early election or a costly conflict with the West,” said Atilla Yesilada, analyst at GlobalSource Partners.


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Published By: Atilla Yeşilada

GlobalSource Partners’ Turkey Country Analyst Atilla Yesilada is the country’s leading political analyst and commentator. He is known throughout the finance and political science world for his thorough and outspoken coverage of Turkey’s political and financial developments. In addition to his extensive writing schedule, he is often called upon to provide his political expertise on major radio and television channels. Based in Istanbul, Atilla is co-founder of the information platform Istanbul Analytics and is one of GlobalSource’s local partners in Turkey. In addition to his consulting work and speaking engagements throughout the US, Europe and the Middle East, he writes regular columns for Turkey’s leading financial websites VATAN and www.paraanaliz.com and has contributed to the financial daily Referans and the liberal daily Radikal.