Erdogan Unbowed by Critics, Leaving Little Stopping Lira’s Collapse

Turkish President Recep Tayyip Erdogan addresses his supporters during a ceremony in Istanbul, Turkey, November 5, 2021. (Reuters)
Turkish President Recep Tayyip Erdogan addresses his supporters during a ceremony in Istanbul, Turkey, November 5, 2021. (Reuters)
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Erdogan Unbowed by Critics, Leaving Little Stopping Lira’s Collapse

Turkish President Recep Tayyip Erdogan addresses his supporters during a ceremony in Istanbul, Turkey, November 5, 2021. (Reuters)
Turkish President Recep Tayyip Erdogan addresses his supporters during a ceremony in Istanbul, Turkey, November 5, 2021. (Reuters)

Little stands in the way of Turkey's currency collapse expanding into a deeper economic crisis after President Recep Tayyip Erdogan ignored appeals, even from within his government, to reverse policy, according to top officials and analysts.

Two people familiar with internal discussions said some government officials are uncomfortable with Erdogan's rate-cutting strategy and told him this. But they have not convinced him, and others have given up trying, they said.

This could set the stage for an intensifying showdown between rattled investors and local savers on one side and on the other, Erdogan - who has dismissed several ministers and top bureaucrats who previously were able to challenge and persuade him on some policy decisions.

"Some people who wanted to convey the opinion to the president that a different policy should be followed were not successful in this," said a senior official in the ruling AK Party, requesting anonymity.

"There is a very strict attitude from the presidency that the current practice will continue, interest rates will be kept low and inflation will decrease along with it."

The presidential office did not immediately respond to a request for comment.

Twice in the last week Erdogan has pledged publicly to see through his battle against high interest rates, dumping fuel on a fire sale of Turkish assets and sending the lira plunging as much as 23% in that period.

Though the currency recouped some losses on Wednesday, anxious Turks say the collapse has upended their family budgets and future plans.

Economists say if Erdogan doesn't reverse course and free up the central bank to hike rates, Turkey faces soaring inflation and possible corporate or bank defaults.

But unlike during 2018's currency crisis - when the central bank jacked up rates, albeit late, to stem the bleeding - there is little prospect of a quick intervention this time.

"The general view at the presidency is that if this policy continues for a few more months, the process will reverse and the exchange rate will fall ... so it appears it will remain in place," said the second source familiar with internal talks.

"The views of some officials ... who do not think these policies are right do not appear to be taken into consideration."

Goldman Sachs analyst Murat Unur said the risk of dollarization remains "very high" given the rush to purchase hard currencies, which already account for more than half of Turks' deposits.

"The current macroeconomic policy mix is not sustainable but the authorities have clearly shown that they prefer low rates and are willing to implement them even if this leads to significant pressure on the lira," he said in a note.

Erdogan unmoved

Erdogan has long espoused the unorthodox view that high interest rates cause inflation and has promised to prove the doubters wrong in what he calls an "economic war of independence" ahead of elections in 2023.

To test his theory, Erdogan has overhauled the central bank leadership and pressed it to slash the policy rate by 400 basis points since September, to 15%, despite inflation running near 20% - and much higher for basic goods like food.

Some of those who in the past advised Erdogan have recently criticized the monetary easing that the president says will stoke exports, investment and jobs.

Economists say inflation could blow through 30% unless steps are taken to reverse the currency depreciation, which raises import prices.

But there is no apparent circuit breaker, especially after Erdogan installed a like-minded governor, Sahap Kavcioglu, at the bank in March and fired the last remaining orthodox policymakers last month.

Treasury and Finance Minister Lutfi Elvan, also seen as a moderate, has kept out of the spotlight and there has been speculation he too could be ousted, though the Palace has not commented.

The central bank left the door open for another rate cut next month - a move Erdogan likely still supports.

Koc University-TUSIAD Economic Research Forum director Selva Demiralp said continued easing will only cancel out any benefits from higher demand.

"Even short term benefits from rate cuts cease to exist if the central bank insists on cutting rates and disregards inflation," said the former US Federal Reserve economist.

The central bank, already lacking credibility, said on Tuesday it would only intervene at times of "excessive volatility" - as the lira dove 15% in its second-worst day ever.

Analysts say authorities could redouble efforts to secure foreign currency swap lines from allies, which could help in any necessary interventions given official reserves remain thin.



Oil Set for Steepest Weekly Decline in Two Years as Risk Subsides

FILE - Pump jacks extract oil from beneath the ground in North Dakota, May 19, 2021. (AP Photo/Matthew Brown, File)
FILE - Pump jacks extract oil from beneath the ground in North Dakota, May 19, 2021. (AP Photo/Matthew Brown, File)
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Oil Set for Steepest Weekly Decline in Two Years as Risk Subsides

FILE - Pump jacks extract oil from beneath the ground in North Dakota, May 19, 2021. (AP Photo/Matthew Brown, File)
FILE - Pump jacks extract oil from beneath the ground in North Dakota, May 19, 2021. (AP Photo/Matthew Brown, File)

Oil prices rose on Friday though were set for their steepest weekly decline since March 2023, as the absence of significant supply disruption from the Iran-Israel conflict saw any risk premium evaporate.

Brent crude futures rose 50 cents, or 0.7%, to $68.23 a barrel by 1036 GMT while US West Texas Intermediate crude gained 49 cents, or nearly 0.8%, to $65.73.

During the 12-day war that started after Israel targeted Iran's nuclear facilities on June 13, Brent prices rose briefly to above $80 a barrel before slumping to $67 a barrel after US President Donald Trump announced an Iran-Israel ceasefire.

That put both contracts on course for a weekly fall of about 12%.

"The market has almost entirely shrugged off the geopolitical risk premiums from almost a week ago as we return to a fundamentals-driven market," said Rystad analyst Janiv Shah.

"The market also has to keep eyes on the OPEC+ meeting – we do expect room for one more month of an accelerated unwinding basis balances and structure, but the key question is how strong the summer demand indicators are showing up to be."

The OPEC+ members will meet on July 6 to decide on August production levels.

Prices were also being supported by multiple oil inventory reports that showed strong draws in the middle distillates, said Tamas Varga, a PVM Oil Associates analyst.

Data from the US Energy Information Administration on Wednesday showed crude oil and fuel inventories fell a week earlier, with refining activity and demand rising.

Meanwhile, data on Thursday showed that the independently held gasoil stocks at the Amsterdam-Rotterdam-Antwerp (ARA) refining and storage hub fell to their lowest in over a year, while Singapore's middle distillates inventories declined as net exports climbed week on week.

Additionally, China's Iranian oil imports surged in June as shipments accelerated before the conflict and demand from independent refineries improved, analysts said.

China is the world's top oil importer and biggest buyer of Iranian crude. It bought more than 1.8 million barrels per day (bpd) of Iranian crude from June 1-20, according to ship-tracker Vortexa, a record high based on the firm's data.