Erdogan’s moves offer little reward | Opinion

Turkey has resisted the temptation to cut borrowing costs, for now. The new head of the central bank, Sahap Kavcioglu, on Thursday kept the main rate at 19%, while hinting at a possible relaxation.

Tayyip Erdogan’s apparent goal of easing monetary policy falters. In March, he abruptly replaced the governor, Naci Agbal, who had raised rates that month by 200 basis points, the third dismissal from the post in two years. Kavcioglu seemed more inclined to please him, having argued that high rates can cause, rather than slow down, inflation.

So far, you have avoided any rough action. But you are setting the stage for relaxation. He spoke of keeping rates above inflation. Since the annual exceeded 16% in March, you can raise them up to 300 points. Meanwhile, the promise of March to maintain a tight monetary policy “for an extended period” disappeared.

But Turkey is worse than before. The lira has lost more than a tenth of its value against the dollar since the appointment. And, having spent more than $ 100 billion in 2020 to shore it up, the bank only has $ 10 billion in net foreign exchange reserves, the lowest level since 2003, giving it little ability to fight a sell-off. Also, the Turks are avoiding it in warehouses.

That means inflation can continue to rise. The growing current account deficit, of 2.6 billion dollars in February, is another cause for concern, especially since the restrictions mean that tourism will suffer again this year, which will hurt exports. Kavcioglu is unlikely to be able to slash rates without risking rising inflation, or even a currency crisis.

Your biggest problem is a lack of credibility. Société Générale estimates that another $ 5.9 billion of capital will leave Turkish assets in the short term. The central bank’s twists and turns make a rate cut even more risky.

The authors are columnists for Reuters Breakingviews. Opinions are yours. The translation, of Carlos Gomez Down, it is the responsibility of Five days


Turkish uncertainty shakes BBVA again | Markets

Just a decade ago, BBVA closed the purchase of 24.9% of Turkey’s second largest bank, Garanti Bank. He paid 4.2 billion euros. In subsequent years, it expanded its participation to reach 49.85% of its shareholding. In total, it has disbursed more than 7,000 million euros. However, political instability in the Eurasian country has greatly devalued its currency, causing significant losses for BBVA. This week, the Turkish crisis was reignited with the removal of the central bank governor, and the consequent depreciation of his currency.

BBVA, which has had to revise the valuation of its stake in Garanti Bank downwards, considers that these new fluctuations in the Turkish lira will hardly affect it, although its price does suffer with each shock. The bank has long had hedges contracted to mitigate fluctuations in the currencies of those countries in which it operates. “We have a coverage of around 60% on the expected results of Garanti BBVA for 2021”, they explain from the entity.

The latest episode began last weekend when the government of Recep Tayyip Erdogan announced the dismissal of Naci Agbal, governor of the central bank, who had raised rates to stop the devaluation of the lira. He is replaced by Sahap Kavcioglu, a former MP for the ruling party and columnist for the Islamist daily Yeni Safak, with little technical experience. He is the fourth governor in two and a half years. On Monday, the Turkish lira started the week with a depreciation of 15%.

A report by the Goldman Sachs bank recalls that the Turkish lira has depreciated 30% since the beginning of 2020 and that this week has been the fourth event of extreme volatility of the currency since 2018. However, the analysts of the US bank consider that “the exposure of European banks to Turkey is limited, the possibilities of contagion very limited and the entities had already discounted possible episodes of volatility in the Turkish economy in their accounts.”

In addition to BBVA, the Dutch ING and the French BNP Paribas also have a presence in Turkey. But the Spanish bank is the one with the largest investment. In the 2020 results, the Garanti group was the third subsidiary that contributed the most (after Mexico and Spain). It contributed 563 million euros, despite all the turbulence. “BBVA’s exposure to Turkey is significant in terms of revenue,” explained from Goldman Sachs. Even so, “the stock market impact of the presence in Turkey of European banking and the perception of risk has been attenuating since 2018”, they point out.

In this latest onslaught, the Spanish bank’s shares have dropped almost 6% for the week. The big question that analysts are asking is: will this be the latest episode of government intervention in monetary policy or will more come? In the four months that the previous governor of the central bank was in office, he managed to give confidence to investors and markets with a return to orthodox policies and a progressive rise in interest rates of almost nine percentage points (currently the rate of reference is 19%) to try to contain the rise in prices, which is close to 16% year-on-year according to official statistics, but is double according to other calculations. The problem is that Erdogan considers that this policy is contrary to the interests of the country, and that the rates should be much lower, as is the case in most Western countries.

In a report prepared by the ratings agency Scope, it is explained that “with the new governor, the central bank is less likely to be proactive in the short term to address the challenges of a weaker lira, rising inflation and high growth of the currency. credit. Instead, Turkey’s significant macroeconomic imbalances may be exacerbated again. “

The fear is that the new governor will lower the interest rate a lot due to political pressure, and that will end up taking its toll on the entire economy of the country. Adrian Hilton, head of foreign exchange at Columbia Threadneedle Investments, believes that this time “the markets are not going to be so easily fooled by Erdogan.” In his opinion, his defense of a heterodox monetary policy has its days numbered and it will not be able to endure long with interest rate cuts.