Analysis: Erdogan’s plan to pull Turkey’s economy out of winter crisis

  • Unorthodox rate cuts triggered lira crisis and inflation jump
  • Deposit system, market interventions from the nerves appeased
  • Ankara sees inflation, reserves lightened by spring
  • Rating agencies and analysts warn of pitfalls ahead
  • Workers stage strikes, protests emerge over tensions

ANKARA, Feb 16 (Reuters) – President Tayyip Erdogan’s government hopes Turks will bear the soaring cost of living for a few more months before inflation starts to drop and tourists arrive, helping the economy to emerge from a winter monetary crisis.

The plan is risky given that small protests have already emerged over annual inflation approaching 50% and many economists expect price and wage pressures to persist throughout the year. Read more

The lira, which plunged 44% last year, is also potentially vulnerable to interest rate tightening by the US Federal Reserve and, closer to home, any Russian military incursion into Ukraine that could strain ties. of Ankara with Moscow and NATO.

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But for now, Erdogan – whose push for unorthodox rate cuts initially sparked the crisis last year – has managed to regain some confidence among savers and investors with a combination of state-backed deposit guarantees and costly market interventions.

This has given the government time for sales tax cuts to cool prices and ease consumer pain, while seeking to boost Turkey’s export sector with low loan rates and planned capital injections into public lenders.

Ankara expects these measures, combined with the lira’s newfound stability and possible base effects, will allow annual inflation to peak in April or May and decline by the end of the month. year to about 24%, well below analysts’ forecasts. Read more

The stakes are high for the 19-year-old Turkish leader who faces an election by mid-2023 that current polls suggest he could lose. Read more

Rating agencies and analysts say that while the budget can fund such measures for now, costs and inflation could skyrocket if the pound comes under further pressure. Rather, simply raising interest rates would be a better way to contain inflation and strengthen the currency, they say.

Real rates are far into negative territory at 35% and official reserves are low and deep in the red when swaps are taken into account, leaving Erdogan’s experiment vulnerable to another crisis.

“The government is now using fiscal space to balance the economy to the extent it can, but of course you can only pull that lever so far given inflation and … massively negative real rates “said New York-based Anupam Damani. head of international debt at investment manager Nuveen.

Erdogan’s main objective is to reduce the chronic current account gap – nearly $15 billion last year – which would rebuild official reserves, which could help the lira, and there are early signs that he might have some success there. Read more

As Turkey’s beaches begin to fill up in May, Ankara predicts tourist arrivals will return to pre-pandemic numbers with nearly $34 billion in revenue expected to arrive, bolstering the sector which accounts for more than 10 % economy. The Turkish Car Rental Association told Reuters that fleet size is expected to rebound by 25% this year, reflecting visitor expectations.

However, it is not uncommon for Turkey to run current account surpluses in the summer only to fall back into a deficit in the winter and it may take an export miracle to change this trend.


After a series of cuts last year to 14% in the key rate, the lira slumped to historic lows in December and inflation soared. Since then, however, amortization-protected deposits and central bank currency sales have calmed markets.

Households and businesses poured some 350 billion lira ($25.5 billion) into protected accounts, almost half converted into hard currency, according to official data.

The central bank has framed the exchange rate in a narrow range near 13.5 to the dollar so far this year, a far cry from the lira’s wild swings in December.

Bankers and economists estimate the central bank spent $20 billion in December and $3 billion in January to prop up the lira, but next to nothing this month and Finance Minister Nureddin Nebati said last week that it was no longer necessary to intervene in the markets.

turkish lira

Erdogan promised to protect Turks from “crushing” annual price increases, including 50% for electricity, 55% for food and 76% for energy. Value added tax on staple foods has been reduced this month and further relief, possibly for housing, is expected.

Nebati appealed for patience and said Turks would wake up to a “very different” reality by the middle of the year.

He also told investors in London that the economy would be even better between now and the election and said now was the “perfect” time to invest, according to one participant.

Yet two days later, Fitch downgraded Turkey’s credit rating deeper into undesirable territory, citing policies that risked raising inflation further, especially if depositor confidence is shaken by renewed stress on the market. Wells Fargo said the lira was the most vulnerable currency in emerging markets. Read more

Goldman Sachs also said that while the state’s deposit protection scheme has been successful in triggering “a wave of dedollarization,” its success adds to the state’s exposure to currency risk.

A test of business confidence comes early next month when February data could show an easing in the trade deficit after it soared in January following a rush to storage in the face of soaring oil prices. import, analysts said.

Meanwhile, the patience the government asks for is running out. Food delivery workers, nurses and other workers have gone on strike in recent weeks, joining other scattered rallies in some cities. Read more

Esat Celik, 32, a construction worker from Istanbul who lives off odd jobs, said he spends more than half his income on food and children’s needs. “I’m unemployed now,” he told Reuters. “It’s very hard to continue like this but let’s see how long it will last.” Read more

($1 = 13.5958 lira)

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Written by Jonathan Spicer; Additional reporting by Can Sezer, Ezgi Erkoyun and Ceyda Caglayan in Istanbul, Rodrigo Campos in New York and Sujata Rao in London; Editing by Tomasz Janowski

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