Turkish leader Recep Tayyip Erdogan has rarely appreciated being told what to do, especially not by global financial elites. In 2009 he stormed out of a panel at the World Economic Forum in Davos, Switzerland, and vowed never to return. He would go on to promise to rid his country of “money barons” in speeches couched in the language of revolution. It was an “economic war of independence,” he said repeatedly.
Freeing your country from the demands of global capital, though, is a costly business. With the lira losing almost 30% of its value against the US dollar over the past year—more than 6% on Wednesday alone—a swollen current account deficit and a central bank that’s burned through currency reserves, Turkey needs foreign money again. Erdogan, it seems, has accepted that.
Enter Mehmet Simsek. After sealing another five-year term as president on May 28 to extend his two decades in power, Erdogan turned to the 56-year-old former banker to serve as a gateway to the financial capitals of Dubai, London and New York. Simsek worked as a strategist at Merrill Lynch and was a senior economist for the US Embassy in Ankara. For Erdogan, he’s also a trusted name.
Critical to luring money back to Turkey is backing from a president who’s dismissed multiple central bank governors and finance chiefs. That would mean Erdogan letting his new economic czar, who’s promised “rational policymaking,” get on with it. “It should come as no surprise if market patience were to wear thin should Erdogan openly oppose Simsek’s proposals,” Mohamed El-Erian, former chief executive officer of investment firm Pimco, wrote for Bloomberg Opinion.
Simsek served as finance minister and deputy prime minister from 2007 to 2018 before Erdogan, 69, appointed his son-in-law to run the economy instead. It was around that time that Turkey’s president went full throttle with his bespoke economic policy, one that wouldn’t be dictated by the whim of international investors. The approach was based on low interest rates, which Erdogan claimed—contrary to empirical evidence and mainstream theory—would also lead to lower inflation.
Global capitalists, generally not fond of revolution, took note—and they took their money, too. Over the last 10 years, the value of foreign investment in the Turkish stock and bond market plunged by about 85%, from more than $150 billion in 2013 to just over $20 billion today. Foreign direct investment also tanked. The lira became practically untradeable outside of Turkey. A member of the Group of 20 large global economies and one of the world’s biggest emerging markets, Turkey became a market dominated by locals.
The policy worked, in one important way: It mattered far less what foreigners thought about Turkey or Erdogan. They had practically no money left in the country, and so little influence over the direction of Turkish financial markets. Wall Street economists who still bothered to criticize Turkish economic policy were screaming into the wilderness, as Erdogan’s government became the dominant player in the market.
The result, mainstream economists would say, was predictable. The annual inflation rate soared to multidecade highs, rising above 100% in Istanbul last year. Prices changed so fast that small businesses stopped printing updates. Parking your car at a garage for the night could cost 50 liras ($2.30) one day, 90 liras the next.
While Turks complained about inflation, they did so probably no more than Americans did in New York or Nigerians in Lagos. Indeed, for anyone watching Turkey, the resilience of the economy remained an enigma. Yes, the currency was on the slide and prices were soaring, but a full-on meltdown didn’t come.
Restaurants, bars, shopping malls and hotels were as full as ever, helped by large influxes of Russians and Ukrainians fleeing the war, alongside tourists from Europe, the Persian Gulf and Iran. Commerce continued. The banks kept lending at rates that were almost too good to turn down, and Turks kept borrowing. The economy grew 5.6% last year, underpinned by consumer spending.
“Cheap credit card debt meant people kept rolling it to finance spending,” says Selva Bahar Baziki, an economist covering Turkey at Bloomberg Economics. They were also trying to get ahead of inflation, buying now to avoid paying more later, she says. “This means that we have been seeing real household consumption growing at unexpectedly high levels.”
But Erdogan’s insistence on the low-rates policy also distorted the market so much that few considered it to be free and open anymore. It was more of a managed economy, where the exchange rate, cost of loans and capital allocation are largely determined by the government.
Even the central bank had to think laterally. Introducing a so-called corridor policy in 2010, technocrats would keep the benchmark rate low and yet also adjust the cost of borrowing daily for commercial banks by deploying two other rates, one above and one below it. Those banks would then pass on the interest rate to their customers.
Erdogan didn’t go along with that approach for long. He eventually pushed out its architect and fired three central bank governors for refusing to lower rates fast enough. Finally, in 2021, he found his man: Sahap Kavcioglu, then a columnist at the Islamist daily newspaper Yeni Safak. Kavcioglu cut the benchmark rate so far below inflation that it became irrelevant. It hardly matters to a foreign investor whether a country has a real interest rate of negative 30% or negative 40%. You just avoid it.
The problem is that Turkey runs a perennial current account deficit. It ended last year at $48 billion, or 5.4% of gross domestic product, the biggest in the G-20 along with the UK. Unlike neighbors in the Middle East, Turkey produces negligible amounts of the oil and gas necessary to power its domestic economy and fill its export coffers. So it has to either attract investment or borrow abroad to plug the gap.
Then there’s the currency. To compensate for a lack of incoming cash and to support the lira, the central bank spent almost $200 billion on market interventions in the 18 months before the presidential elections. That’s the equivalent of the entire GDP of another midsize emerging market such as Hungary or Kuwait. The policy was unsustainable, and this week it began to fall apart. At Simsek's request, the central bank temporarily halted interventions via state-run banks on Wednesday and the lira promptly plunged almost 7%. The options market is pricing in a more than 60% probability that it'll fall another 15% within three months.
In his acceptance speech on June 4, Simsek said “transparency, predictability, consistency and compatibility with international norms” will form the basis of his stewardship of the $900 billion economy. The challenge is pleasing international capital markets without alienating his boss. Questions of capital aside, Erdogan still runs Turkey.
Simsek “soon needs to show through policy measures that he will be allowed to take action to get inflation down,” says Henrik Gullberg, macro economist at London-based brokerage Coex Partners Ltd. “Burden of proof is on him to show that this is more than a token appointment.”
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