Turkish Finance Minister Berat Albayrak, long the presumed successor of his father-in-law President Recep Tayyip Erdogan, abruptly resigned from his post on November 8, 24 hours after the appointment of a new Central Bank chief.
The Turkish lira, which has lost more than 80% of its value against the US dollar since Albayrak took the helm, got a boost on the news. Yet markets should temper their optimism.
The opaque political shake-up reflects internal political turmoil within the Erdogan regime, raising the possibility that the Turkish leader may try to hold his son-in-law responsible for his economic failures.
It does not, however, mean that a correction is on the way.
The Turkish lira has witnessed an unprecedented depreciation in recent weeks, dropping 7.5% in a month and losing more than half of its value since the start of 2020.
This collapse resulted in the sacking of the governor of the Central Bank of the Republic of Turkey (CBRT), Murat Uysal, by Erdogan on Saturday night.
Uysal had only assumed his post in July 2019 after Erdogan fired his predecessor, Murat Cetinkaya. It was the first time in Turkish history the governor of the central bank had been removed by presidential decree.
While Turkish citizens were trying to understand what this latest sacking would mean politically and – more importantly – in terms of economic policies, Albayrak resigned in a highly unusual manner, releasing a statement (in rather poor Turkish) via Instagram.
Albayrak, 42, put forward unspecified health reasons for his decision.
His announcement followed the replacement of the Central Bank chief with former finance minister Naci Agbal, a critic of Albayrak’s economic management.
Rumors swept Twitter on Sunday night that Albayrak had an altercation with Agbal after finding out his counterpart had briefed Erdogan on the state of the economy in his absence.
Since then, there has been no official statement from neither the office of the Ministry of
Finance, nor from Erdogan’s Palace. Even the media, mainly controlled by Erdogan, has been quiet about the son-in-law’s resignation all of Monday.
Even for the Turkish people and close observers of the country familiar with the arbitrary management of the Erdogan presidential regime, the weekend’s developments come as a horrendous reflection of the collapse of Turkey’s institutional structure.
Lira value decimated
Albayrak’s journey as finance minister began in July 2018, when Erdogan appointed him as economic chief of his new presidential regime, following a stint as minister of energy and national resources from 2016 to 2018.
At the time, it was clear that Erdogan put his son-in-law in charge of the economy, followed by the pro-AKP Uysal in charge of the Central Bank, to control the levers of the economy.
The Turkish lira was 4.6 to the US dollar at the time of Albayrak’s promotion, which came in the midst of a currency crunch.
When he resigned on Sunday, the Lira stood at 8.5 to the dollar, a depreciation of 84%.
Despite a total lack of transparency amidst the abrupt firing and resignation, the lira had its best day in two years on Monday, gaining more than 5% and calming to 8.01 to the US dollar from 8.5 on Friday. The index of Borsa Istanbul (BIST) is also up 3.5%.
The lira’s appreciation and the strong upward movement of the BIST suggests an optimism over the recent developments.
It seems that the removal of Uysal and resignation of Albayrak are interpreted as the Erdogan government preparing to step away from its unorthodox monetary policies, which have been consuming the Central Bank’s international reserves.
It follows that they may finally be ready accept a rate hike to prevent the currency’s free fall, which is swiftly leading the country to a possible debt crisis.
Yet it is hard to comprehend the source of this optimism following the debut statement from new head of CBRT Naci Agbal, which is nearly identical to the statement made when Uysal took the position almost a year earlier.
In his first statement as bank governor in July 2019, Uysal had emphasized that the Bank would continue to independently implement monetary policy instruments focused on achieving and maintaining its primary objective of price stability in line with the duties and responsibilities granted to him by law.
Similarly, Agbal said that the primary objective of CBRT is to achieve and maintain price stability and they will “decisively use all policy tools in pursuit of its price stability objective. The monetary policy communication will be strengthened in the framework of transparency, accountability and predictability principles.”
Now, the optimistic expectation is that the Central Bank will raise the official policy rate (weekly repo rate) to at least 14.25%, which is the level of the back door interest rate, the average funding rate of CBRT.
Erdogan shifting blame?
On Monday night in a statement, Erdogan accepted the resignation of his son-in-law. This may open the possibility for a change in economic policy, but one which will likely be set by Erdogan.
Erdogan’s options, under the conditions of the Covid-19 crisis and given the economy’s deep-rooted problems are not many.
He has famously labeled interest as “the mother of all evils, the mother of inflation”, and for years has relied on a constant influx of foreign capital to finance his government’s projects – a supply which has been drying up.
When Albayrak took over the Finance Ministry in 2018, Turkey resorted to selling its international reserves to stabilize its currency using the public banks. Goldman Sachs Group economists estimated that in 2020 alone, Turkey had sold off international reserves worth US$100 billion.
Turkey’s gross external debt stood at 57% of GDP by the second quarter of 2020 and its current account deficit in the first eight months of the year reached $26 billion.
Albayrak’s interventions, which failed to tackle any root cause of the lira’s depreciation, left the country even more vulnerable to external shocks.
The ratio of gross international reserves to short-term external debt – an indicator of financial vulnerability – dropped to 46.2% in August, its lowest level since 2011, according to Ministry of Finance and Central Bank statistics.
Turkey faces the ever-growing risk of its currency crisis turning into a debt crisis if international markets decide not to roll over its debt.
Under these circumstances, Turkey does not have the luxury to have faith in the lira, as Albayrak has been urging the country for the two weeks before his departure.