Erdogan blames ‘foreign financial instruments’ for Turkey’s currency crisis as central bank reserves fall

People shop at a local market in Istanbul, Turkey, on December 5, 2021. The devaluation of the Turkish lira has weakened the purchasing power of citizens.

Khan Demirtas | NurPhoto via Getty Images

Turkish President Recep Tayyip Erdogan has pledged to reduce the country’s soaring inflation rate, which hit 36% in December, as the country’s central bank prepares Another rate-setting meeting is held this week.

Speaking to parliament on Wednesday, Erdogan said he was protecting the country’s economy from “foreign financial instruments that could disrupt the financial system,” according to a Reuters translation.

“Inflated inflation is not in line with the reality of our country,” the president added, vowing to support recently announced government measures to support severely weakened lira The “unjust” price hikes will soon be tamed.

Economists who commented on the news were not impressed.

“Erdogan is more thorough, more thorough,” Timothy Ash, emerging markets strategist at Blue Bay Asset Management, wrote in an email shortly after the speech.

“Foreign institutional investors don’t want to invest in Turkey because of the absolutely crazy monetary policy setup Erdogan has put in place,” he wrote. “No foreign conspiracy.”

Turkish Lira Its value has shrunk by 44% in 2021, largely due to the president – who essentially controls the leverage of Turkey’s central bank – refusing to raise interest rates to keep inflation in check. When the Turks lost hope for their currency, they also looked beyond the lira: Turkish stores now show prices in US dollars, the Turks are put their money in cryptocurrencies like bitcoin and ether.

“If RTE [Recep Tayyip Erdogan] Johns Hopkins economist Steve Hanke tweeted Wednesday that he said Turkey was “dollarizing spontaneously.”

His tweet featured an article in the Israeli daily Haaretz titled “Even the Turkish lira no longer believes in Erdogan.”

Central bank reserves fall

The picture isn’t entirely bleak: Turkey’s November industrial production and retail sales figures were positive, “suggesting that the Turkish economy was doing well in the early days of the currency crisis,” wrote Jason Tuvey, senior emerging markets economist at Capital Economics.

“But we doubt that this force will last longer, as the more deleterious effects of December’s sharp fall in the lira filter out,” Tuvey added.

“While the export sector is likely to hold up well, the consumer-led sector will suffer from soaring inflation, which hit 36.1% in December and is set to rise further.”

How long can this last?

Analysts estimate Turkey’s short-term debt at just over $180 billion, a current account deficit of around $1-20 billion, and total external financing needs around $200 billion. With the central bank’s total reserves at around $109 billion and likely to continue to decline with dollarization, spending to support the lira, and potential further foreign capital flight, financing of the currency’s reserve coverage doesn’t look very strong.

So how long can central banks continue to intervene to support the lira? “If it continues to keep pace with December’s intervention, the answer won’t be long, remember the lira was only flat this month,” Ash wrote.

Meanwhile, Erdogan continued to push his own economic theories, insisting on Wednesday that the link between interest rates and inflation has long been overlooked in some other countries — a comment some critics pointed to on the currency side Compare Turkey to Argentina, Venezuela or Iran policy.

“I am now concerned about the message to foreign investors,” Ash wrote.

“Erdogan told the world that Turkey does not need foreign capital, foreign portfolio investors are not welcome, Turks can finance their own economy. His economic policy slogans have fallen out of favor… I think investors Is Turkey heading for a systemic crisis after asking yourself why should they continue to finance the Erdogan government’s bad policies? Any newly issued funds will disappear in ineffective and stupid foreign exchange interventions?