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17th of July 2018

Economy



Turkey’s finance minister hits out at questions over central bank

Laura Pitel in Istanbul

July 12, 2018 Print this page

Speculation about the independence of Turkey’s central bank is “unacceptable,” the country’s new finance minister warned on Thursday as Moody’s highlighted investors’ mounting concerns about the bank’s role after the adoption of new powers by president Recep Tayyip Erdogan.

Berat Albayrak, who is also Mr Erdogan’s son-in-law, said the central bank would be effective “like never before” and promised to bring soaring inflation down into the single digits “in the shortest time possible”.

In his first detailed comments since his appointment this week as Turkey’s treasury and finance minister, Mr Albayrak vowed to prioritise budget discipline, tackle inflation and deliver “stable and sustainable growth”, according to comments published by the state-run Anadolu agency.

“Speculation about the independence and decision-making mechanisms of the central bank is unacceptable,” he added. “A central bank that is effective like never before will be one of the fundamental aims of the policies of the new era.”

Mr Albayrak, who was previously energy minister, also promised to announce a medium-term plan that would include “structural reforms, a holistic approach and a strong macroeconomic perspective”.

But in a note issued after an overnight slide in the lira, Moody’s warned that changes to the central bank’s governance and recent comments by Mr Erdogan — a self-declared “enemy” of high interest rates — suggested the government’s resolve to tighten monetary policy “may weaken rather than strengthen in the coming months”.

It said that any further undermining of perceptions about central bank independence would “likely exacerbate investor concerns, with negative implications for the cost and availability of the foreign capital inflows on which Turkey’s economy and financial system depend”.

Investors have been unnerved by Mr Erdogan’s decision to place his son-in-law in charge of the economy brief while sidelining familiar and respected former ministers.

The alarm was fuelled by changes to the rules for appointing the central bank’s governor and deputy governors after the transition to a muscular new executive presidency, which came into force after elections last month.

The new system abolished the role of prime minister and placed wide-ranging new powers in Mr Erdogan’s hands, including the right to directly appoint the central bank governor.

Turkish assets were hammered in the days after the new cabinet line-up was unveiled at the start of the week. The lira hit a new all-time low in the New York trading day on Wednesday, dropping as far as TL4.9767 amid concerns about Turkey’s economic management and central bank independence. Earlier in the day, Mr Erdogan had predicted that interest rates would fall in the period ahead.

The currency recovered some of its losses in the wake of his remarks, strengthening to trade at around TL4.80 to the dollar on Thursday. Investors remain nervous, however, about the management of Turkey’s $880bn economy, which is suffering from double-digit inflation and a wide current account deficit. Analysts say it is vulnerable to a stronger dollar and tightening global liquidity — vulnerability that is compounded by concerns about political pressure on the central bank.

“The lira remains ultra-sensitive to any comments from prominent Turkish officials about monetary policy,” warned Piotr Matys, an emerging markets currency strategist at Rabobank.

A weakening lira will reignite concerns about Turkey’s corporate sector, which holds almost $300bn in foreign currency denominated debt.

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“At these levels of stress, restoring credibility has become an urgent task,” said Alvaro Ortiz Vidal-Abarca, chief economist for Turkey at the Spanish bank BBVA. He called for an emergency rate rise by the central bank, whose next scheduled rates decision is on July 24, to “eliminate doubts” about its independence.

Mr Ortiz Vidal-Abarca also called for the government to announce a programme of fiscal consolidation and to accept the need for a period of lower growth to correct imbalances, including annual inflation that topped 15 per cent in June.

Turkey’s central bank announced three interest rate rises during the campaign for June 24 elections, with a cumulative total of 500 basis points. The bank’s benchmark lending rate stands at 17.75 per cent.

But in its note, Moody’s warned that these steps had not been enough to quell investors’ anxiety.

Turkey must find about $200bn a year in foreign financing — which it obtains at present chiefly in the form of short-term “hot money” flows — to fund its current account deficit as well as the maturing debt.

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