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In Turkey, fiscal and monetary discipline is skin deep

I’m not a Turk, but have lived here long enough to acquire a rudimentary understanding of the innerworkings of Turkish…

In Turkey, fiscal and monetary discipline is skin deep

I’m not a Turk, but have lived here long enough to acquire a rudimentary understanding of the innerworkings of Turkish politics under president Erdogan.  I read the accolades heaped upon Central Bank of Turkey (CBRT) after “its brave decision ” not to cut rates on Wednesday and the pursuant calls to buy TL on account of a renewed commitment to monetary (and also fiscal discipline, since economy czar Albayrak met FY2018 target of a deficit of TL72 billion).


I would dare the authors of these high-brow research papers to repeat their views to any Turk on the street and dare face  the  ridicule they shall  receive.  In Turkey, CBRT does not make monetary policy. Erdogan does.  He has temporarily relegated that task to Albayrak, who is a quick learner, having grasped immediately that a rate cut would destroy TL.  The budget deficit of 1.9% of estimated 2018 TL GDP was achieved by one-offs, such as revenues from a plethora of amnesties and by withholding payments to drug companies, medical appliance procurers, pharmacies (who have to provide  prescribed medicine to any Social Security card holder, and hope Social Security Administration will pay the bill “eventually”) and of course to contractors, which are seeking bankruptcy protection by the dozen by the week.


So far, Albayrak persuaded Erdogan to stick to discipline, because he has devised clever ways to shift traditional pre-election pork-barreling to novel channels.    In as much as foreign investors don’t care a whiff about Turkey’s end March municipal elections, these are critical to the legitimacy of Erdogan’s presidential rule and the future of AKP. According Reuters, quoting party insiders, AKP has dropped as low as 35%, and may lose Ankara (in addition to Izmir) and a string of mid-size cities to CHP.


Because of that  fear, pork-barreling has been rampant, but it has taken the form of jaw-boning banks to cut loan rates, or to reschedule maturing loans to favored companies, pressuring retailers to cut prices, forcing state lenders Ziraat and Halk to help refinance credit card debt and small and medium size companies’ working capital needs at rates way below the market.


Yet none of these seem to have an impact on the deepening economic malaise or how negatively the public feels about the future.  In a recent article, pro-AKP Hurriyet columnist Abdulkadir Selvi reports a poll by Optimar, another stalwart AKP supporter, which finds 61.2% of the respondents rate “economy” as their main concern. Reportedly AKP leads the pack with a 44.5% share of the vote, but 27% of the electorate is undecided and 35% won’t follow party lines. It is obvious that unless AKP manages to improve economic conditions, these large groups of voters will stay home or migrate to other parties.


To make matters worse, all the a la Turca methods of populism deployed to date have not improved the economy, or consumer perceptions by an iota. As of November, total turnover in private sector (encompassing retail, trade, industry and construction) decelerated to 15.4% YoY, and falling 6% MoM, compared to CPI and PPI inflation of 21% and 33%, respectively. Private broadcaster BloombergHT’s January preliminary   consumer confidence index slipped 7.5% MoM, languishing at 10-year lows.  By October (which also covers November initial household survey), non-farm unemployment soared over 13.5%.


In a nutshell, Albayrak’s alternative medicine has failed to work its miracle. Knowing Erdogan, I’d guess he is running short of patience and planning to go no-holds-barred as early as February if polls don’t improve.


A new wave of populism could amount to spending heavily at home by borrowing abroad, announcing new subsidies to select constituencies via state banks, even an extraordinary MPC meeting of CBRT to cut rates.


Erdogan can’t afford to lose, and he has nothing to offer to an angry  constituency but  lean pork.  He will spend and ease first, and deal with the consequences later.   This unfailing pattern repeated in each election cycle of the last 15 years may be one of the reasons, why Turkish retailer savers began accumulating F/X deposits as of last week to the tune of $1.9 bn in a week.


Buy TL?  Don’t make me  snigger please, I learned not to bet against Erdogan’s survival instinct  long time ago.


Damon H Grande




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