Date Published
8 May 2021

Article Posted by
Andrew Kinsey

Featured topic
bond and foreign exchange markets     


The firing of the Turkish central bank governor by President Erdogan predictably had sharp ramifications in the currency and bond markets. It is a lesson for all emerging markets as to not what to do. South Africa had a brief flirtation with politicisation of economic under Zuma when a well-respected finance minister was fired, a move that thankfully was quickly reversed.       

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The Macro View

“Turkey shoot?”

The firing of the Turkish central bank governor by President Erdogan predictably had sharp ramifications in the currency and bond markets and is a reminder to hotheads in South Africa the financial pain that political interference will cause. Inflation, already high, will soar and confidence evaporates. We had a brief taste of this under Jacob Zuma, but this thankfully was quickly rolled back. This Erdogan move is a turkey shoot because the interests of the politicians have diverged from the interests of the broader populace. Strongman politics at its worst.

Why does Erdogan want to make the Turkish lira a complete Turkey Shoot?

On 19 March 2021, Turkish President Recep Tayyip Erdogan fired both the Turkish Central Bank Governor and Deputy Governor in an attempt to wrest back control of monetary policy from his appointed financial technocrats.

In their stead he has appointed a ‘little known academic and newspaper columnist’ whose main redeeming quality in the eyes of the President is strong loyalty to the President. Predictably the Turkish currency and capital markets responded in a negative fashion.

At the close of business on 19 March the Turkish lira closed against the US dollar at TRY7.22. The opening price on the following Monday was TRY8.32, a 14% train smash. The Turkish 10-year bond closed on the Friday at 13.6% and traded as high as 20.0% on the 22 March.

Predictably losses to both international and local investors were heavy, but in the final analysis will probably pale into insignificance compared with the loss of confidence in Turkey as a destination for much needed international capital.

The first question that springs to my mind when an event like this occurs is why politicians and governmental officials think they will escape the market repercussions for the incompetence and capriciousness that they have acted with.  

Ostensibly Erdogan fired Naci Agbal because the main central bank lending rate was raised too high and too quickly for Erdogan’s liking. The final straw was a 2% increase when the market was only expecting 1% and Erdogan was probably demanding a cut of 2%.  

Anyhow, what the strongman says goes. Within a day the governor was gone, and monetary policy is now in the hands of people who believe that high interest rates beget high inflation.  Not exactly monetary orthodoxy.

In the last 18 months Turkey’s core inflation rate has more than doubled to 16% at last print. High interest rates that were imposed in 2018 seemed to have done their job of wringing inflation that had peaked at 25% out of the system. That hard-won ‘success’ may have to be done all over again.

For South Africans witnessing these goings-on it is déjà vu all over again.

Our own aspirant strongman, and latter-day repudiator of the constitution when it doesn’t serve his purposes, Jacob Zuma, thought he could weave his own self-serving magic by replacing a competent and well-regarded Finance Minister with a man, you guessed it, whose main redeeming quality in the eyes of the President is strong loyalty to the President.

Fortunately for South Africa, the President was forced to back track and Des van Rooyen sunk virtually without trace.

Another positive I suppose, was that we never got to learn what van Rooyen’s guiding principles of fiscal management were, as he was in and out of office faster than a wheelspin at the traffic lights. I doubt that we would have been impressed in any event.

So why do these men do what they do?

The triumph of short-term political expediency and arrogance over common sense and realities in the markets is my first guess. Although Erdogan has a strong grip on central power, he has recently lost power to a rival party in the city of Ankara.

As Turkish growth prospects have ebbed and waned so too has the popularity of the President. Officials who have been more focused upon longer-term issues facing the Turkish economy must have been subjected to serious tongue lashings in private and the government leaning press.