Erdogan’s Plan to Manage Türkiye's Economic Crisis Gets Summer Reprieve

A man walks past a currency exchange office in Istanbul, Türkiye, June 10, 2022. REUTERS/Dilara Senkaya/File Photo
A man walks past a currency exchange office in Istanbul, Türkiye, June 10, 2022. REUTERS/Dilara Senkaya/File Photo
TT
20

Erdogan’s Plan to Manage Türkiye's Economic Crisis Gets Summer Reprieve

A man walks past a currency exchange office in Istanbul, Türkiye, June 10, 2022. REUTERS/Dilara Senkaya/File Photo
A man walks past a currency exchange office in Istanbul, Türkiye, June 10, 2022. REUTERS/Dilara Senkaya/File Photo

A windfall of foreign funds arriving in Türkiye and sustained interest in a state-backed deposit scheme have brought some relief for President Tayyip Erdogan's economic plan less than a year before tight elections.

Erdogan's program stressing monetary stimulus, exports and economic growth sent inflation soaring when the central bank slashed interest rates by 500 basis points late last year, setting off a historic currency crash in December.

Even as annual inflation reached 80% last month, straining households and sapping earnings, the government has stuck to its unorthodox plan which it expects will eventually help flip the country's chronic current account deficits to surpluses. Strong exports and tourism have helped to finance a current account deficit which narrowed in June, despite heavy energy costs, according to the latest data.

Relief began in July when foreign visitors jumped by more than 50%, exceeding pre-pandemic levels thanks partly to Russians with nowhere else to go given sanctions over the war, Reuters reported.

The central bank's foreign reserves - badly depleted from nine months of supporting the lira - have nearly tripled since early July to $15.7 billion on a net basis. Bankers say inflows of some $5 billion from Russia provided a boost, though authorities have not commented and do not publish such data.

Adding to relief for Erdogan, a lira-protection scheme unveiled during the December crisis cleared a big hurdle in July and August when $30 billion in deposits were rolled over without issue, according to data calculated by bankers.

Only a further $3 billion in deposits need to be rolled over next month, and little more until next year, locking many companies in for another six months to the scheme known as KKM.

The scheme seeks to curb demand for foreign currency by compensating depositors for lira losses against foreign currencies.

Given the lira has shed 27% to the dollar this year, KKM costs are rising for the Treasury and the central bank, which pay depositors the difference.

But most companies and individuals have stuck with KKM, avoiding another rush to foreign currencies and a potential repeat lira crash with less than a year before Erdogan faces tight elections.

"The cost is high but if this amount was being kept in forex then we would face bigger problems," a source with knowledge of the matter said.

"If there was any other alternative it would have been used but it looks like this will continue, at least until the beginning of next year," the source said of the scheme, requesting anonymity given sensitivities of the government plan.

Depositors are lured to KKM by cheaper credit and tax incentives, bankers, companies and officials told Reuters. In total, protected deposits are worth 1.2 trillion lira ($66.23 billion), data shows.

The central bank does not disclose its KKM-related costs.

But since it was introduced on Dec. 20 - the day the lira hit an all-time low of 18.4 to the dollar - KKM has cost the Treasury 60 billion lira, 20 billion lira more than this year's budget allocation for the scheme.

The scheme, along with big forex interventions by the central bank, helped rescue the lira at the time.

But the currency has since tumbled back to near its record low, hitting 18.15 to the dollar after the central bank shocked markets last week by cutting its benchmark interest rate by another 100 basis points.



Turkish Stocks Jump as PKK Disbandment Adds to Trade Relief

 People walk on a small street leads that to the historical Galata Tower in Istanbul, Türkiye, April 25, 2025. (Reuters)
People walk on a small street leads that to the historical Galata Tower in Istanbul, Türkiye, April 25, 2025. (Reuters)
TT
20

Turkish Stocks Jump as PKK Disbandment Adds to Trade Relief

 People walk on a small street leads that to the historical Galata Tower in Istanbul, Türkiye, April 25, 2025. (Reuters)
People walk on a small street leads that to the historical Galata Tower in Istanbul, Türkiye, April 25, 2025. (Reuters)

Turkish stocks jumped on Monday, bonds climbed and the lira rallied against the euro as news the Kurdistan Workers Party (PKK) militant group was ending its four decade-long insurgency in the country added to US-China trade cheer.

Global share markets were enjoying a strong surge after the US and China agreed to slash tariffs, but Turkish equities outstripped most other bourses as they jumped more than 3%.

A PKK member said it was ceasing all military operations "immediately" following the group's decision to disband, a move that could boost NATO member Türkiye's political and economic stability.

The lira was up 1.3% against the euro and steady against the dollar, while its international market bonds, which have been losing ground for the last six months, were up nearly 0.7 cents.

The PKK decision followed an appeal from its jailed leader Abdullah Ocalan in February to disband. It is set to have far-reaching political and security consequences for the region, including in neighboring Iraq and also in Syria, where Kurdish forces are allied with US forces.

Omer Celik, spokesperson for President Recep Tayyip Erdogan's ruling AK Party, said the PKK's decision to dissolve was "an important step toward a terror-free Türkiye".

There have been intermittent peace efforts over the years, most notably a ceasefire between 2013 and 2015 that ultimately collapsed.

The PKK's move should now give Erdogan the opportunity to boost spending in the mainly Kurdish southeast of Türkiye, where the insurgency has handicapped the regional economy for decades.

Analysts welcomed the PKK move but added a note of caution.

"It can only be good news," said Christopher Granville, managing director of EMEA & Global Political Research at investment advisory firm TS Lombard. "But is it decisive for the difficult Turkish investment case?"

He said the PKK issue was ultimately "secondary" to questions about Türkiye's recent arrest of Erdogan's main political rival, Istanbul Mayor Ekrem Imamoglu, and the broader direction of its macroeconomic policy.

Those concerns have weighed on Turkish markets this year.

MSCI's Türkiye equities index is down more than 13% compared to a near 8% rise in its pan-emerging market index., while lira-denominated government bonds have cost investors more than 8% on a total returns basis.

The cost of insuring Ankara's government debt using Credit Default Swaps (CDS) has also shot up, although Monday's rally saw that ease back.

"A continuation of the pullback (in CDS levels) ... may support banking stocks, which have been the negatively differentiated sector in BIST (Turkish stocks index) in the last 2 months," Garanti BBVA Yatirim's Director Ozgur Yurtdasseven said.

Turkish banking stocks were up 3.8% on the day, but remain more than 16% down on the year in lira terms and more than 20% in dollar terms.