Turkey’s Currency Plunges, Potentially Threatening Erdogan’s Re-Election Bid
Posted May 23, 2018 6:06 p.m. EDT
ISTANBUL — President Recep Tayyip Erdogan of Turkey called early elections for June 24, more than a year earlier than scheduled, in part to get ahead of tremors in the economy. But on Wednesday they caught up with him as the country’s currency, the lira, took a steep dive, presenting a potential danger to his re-election campaign.
The lira fell close to five to the dollar Wednesday, a 20 percent drop this year, according to Reuters, before the Central Bank stepped in to buck it up with a sharp increase in one of its primary lending rates, to 16 percent from 13.5 percent.
The turbulence was not only a sign of growing investor alarm at the state of Turkey’s economy. The drop in the lira has also left some of Turkey’s biggest businesses embattled, while eating deeply into the living standards of ordinary Turks, meaning voters.
In that regard, it could not come at a worse time for Erdogan, who officially opens an election campaign Thursday that is expected to emphasize his economic achievements and impressive year-on-year growth over 15 years at the head of government.
Despite that record, business leaders and financial markets have shown increasing concerns over Erdogan’s management of the economy as he has accumulated power, with the possibility that the June election for a newly enhanced presidency will give him still more swagger.
Financial analysts and political opponents say the latest plunge in the lira was set off by Erdogan himself, and by his overriding of his financial officials and the Central Bank, in particular his rejection of their calls to raise interest rates.
Turkey’s inflation rate is over 10 percent, but out of a desire to maintain high growth rates, Erdogan has opposed raising interest rates, which financial analysts say is needed to ease the pressure on the currency.
The president set off the latest decline of the lira with comments in an interview with Bloomberg News on Monday, when he revealed his intention to take even greater control of the Central Bank if he wins the election to a new, more powerful presidency.
“From the moment we move to a presidential governing system, our effectiveness there will be very different,” he said, referring to the Central Bank. “We’re going to do this so we can be held accountable for the responsibility we’ve taken.”
“When the people fall into difficulties because of monetary policies, who are they going to hold accountable?” he said. “They’ll hold the president accountable. Since they’ll ask the president about it, we have to give off the image of a president who’s influential on monetary policies.”
Opponents of Erdogan warn that an economic crisis is nearing.
“This rhetoric is extremely dangerous and will put Turkey in a dead-end street,” Durmus Yilmaz, a former governor of the Central Bank who is running for parliament, said of Erdogan’s remarks in London. “Turkey did try the exact same thing in 1994, and that’s how we ended up with a crisis.”
The president’s officials would have none of it. His deputy prime minister, Bekir Bozdag, cast the lira’s fall as a foreign plot to damage Erdogan.
“Those who believe that by manipulating the dollar they will lead to results that will harm the nation and their pockets and change the election result, are mistaken,” he told the semiofficial Anadolu news agency.
Economy Minister Nihat Zeybekci, speaking to the news channel NTV, blamed speculators.
“We have instruments that the necessary steps can be taken about monetary policies and the value of the lira,” he said. “The relevant institutions have very strong instruments.”
One reason for the pressure on the lira is that the U.S. Federal Reserve has been raising interest rates and drawing international capital away from emerging markets like Turkey. It can be remedied if Turkey raises interest rates, analysts say.
But Erdogan may have overreached. After 15 years of growth and easy credit, his country has accumulated a great deal of foreign credit it is now struggling to finance, analysts say.
Turkey’s corporate foreign currency debt has ballooned since 2009, and 80 percent of it is held by Turkish banks. With the slide of the lira, they are struggling to service the debt and are no longer extending credit to Turkish businesses.
Two of Turkey’s biggest companies have recently entered discussions to refinance their debt. Yildiz Holding, a global confectionary and cookie business owned by Turkey’s richest man, entered negotiations to refinance $7 billion of debt in March.
The credit crunch is affecting small and medium-size businesses, too, said Atilla Yesilada, an investment analyst. “Just look at the empty shops in the main streets,” he said. “It has been the last three years, the currency depreciation continues and people are suffering.”
Economists and financial analysts say the rot lies within Turkey, where crony capitalism and corruption have grown as the rule of law and an independent judiciary, essential bulwarks for foreign investors, have been eroded under Erdogan.
Foreign direct investment has declined to a third of previous levels. Credit rating agencies have downgraded Turkey’s sovereign debt rating in recent months, citing a lack of economic structural reform and a removal of checks and balances by Erdogan.
At a campaign rally, Muharrem Ince, a physics professor who is the leading presidential challenger, called on Erdogan to cease interfering with the Central Bank and to stop listening to advisers who were feeding him false information.
He advised the president to reassure the nation that public fiscal discipline was a priority, rather than funding his mega-construction projects, and to quash rumors of currency controls.
“The economy is sinking,” Ince told supporters. “We are about to crash into a wall. My beloved nation, the truck is about to crash into the wall.”