The few remaining market-friendly members of Recep Tayyip Erdogan’s economic team, were notably silent as the Turkish lira plummeted to record lows day after day.
As warnings of a full-blown currency crisis increased weeks before crucial presidential and parliamentary elections, it was the president’s son-in-law who was left to speak out. Berat Albayrak said the beleaguered lira was the victim of an “operation” of “overseas origins” aimed at bringing down the government.
That Mr Albayrak has become one of the president’s closest confidants in recent years is a symbol of the growing siege mentality at the presidential palace. Analysts and officials say that, over the 15 years that Mr Erdogan has dominated Turkish politics, threats both real and imagined have forced him to retreat into an inner circle of people who tell him only what he wants to hear.
“His advisers are a bunch of idiots and sycophants,” says one Turkish official. “He no longer listens to sensible advice.”
Investors blame Mr Erdogan’s opposition to interest rate rises for exacerbating the currency crisis, which has seen the lira lose about 17 per cent of its value against the dollar over the past month. The central bank finally raised its late-night liquidity window rate by 300 basis points to 16.5 per cent at an extraordinary meeting on Wednesday. It is a key rate at which banks can borrow just before the local market closes.
The lira lost 5 per cent of its value during Wednesday trading, but the central bank’s action wiped out those losses and the currency moved 2.5 per cent higher than it had been at the start of the day.
But investors were left wondering if the damage had already been done.
Mr Erdogan has always had what analysts politely term “unorthodox” views on interest rates, arguing that they cause rather than curb inflation. Just hours before the last emergency hike, in January 2014, Mr Erdogan was voicing his opposition — but he was also insisting on the independence of the central bank.
Four years later, the president still maintains that the bank is independent. But many investors no longer believe him. As he has consolidated his power, they have increasingly come to believe that he no longer listens to economic pragmatists.
As the lira began a fresh descent last week, Mehmet Simsek, the deputy prime minister and the government’s most senior economic official, resorted to tweeting that he continued to “hope & believe” that sound policy would win out. Since then, the former Merrill Lynch banker’s tweets have included an animal video and a congratulatory message to Galatasaray football team — but until the central bank acted, nothing on the lira.
Instead, his voice has been drowned out by more eccentric members of the president’s economic team. They include Yigit Bulut, famous for once claiming that Mr Erdogan’s enemies were trying to kill him via telekinesis, and Cemil Ertem, who last month vowed to do the “exact opposite” of advice from the International Monetary Fund.
Throughout his turbulent rule, Mr Erdogan’s supporters have credited him with presiding over a robust and often booming economy, in contrast to financial woes his ruling Justice and Development Party (AKP) inherited when it first swept to power in 2002.
Foreign investors flocked to Turkish markets. The construction and retail sectors boomed as hundreds of new shopping malls sprang up across the country. Millions of people took out their first credit card or acquired their first mortgage.
There were warnings that Turkey was gorging on the easy credit that flooded emerging markets in the aftermath of the global financial crisis, and was failing to implement necessary structural reforms. But it continued to defy the naysayers.
Even after the upheaval of a coup attempt in 2016, the economy bounced back the following year, driven by government incentives that powered growth of 7.4 per cent.
That growth, however, has come with concerns of overheating as the current account deficit has widened and inflation has reached close to 11 per cent. There have been warnings that Turkey’s heavily indebted corporate sector’s reliance on foreign funding makes it among the most vulnerable to a stronger dollar and future US rate hikes.
It was against this backdrop that markets rallied at first when Mr Erdogan called snap elections last month in the hope the June 24 polls would end political uncertainty and allow much-needed reform. But during a visit to London this month, Mr Erdogan lectured investors on the ills of high interest rates and vowed to take greater control of economic policy, turning that view on its head.
“That was a real turning point,” says an analyst at a London-based consultancy that counts big institutional fund managers among its clients. “For so long, investors were convinced that this government was pro-business. Now they are asking me: does he seriously believe this?”
Still, the president’s apparent recklessness with the currency has left many observers baffled. Durmus Yilmaz, a former central bank governor who advises the opposition IYI party, suggested that the president may be deliberately crashing the lira to create a sense of national crisis to boost his support in elections.
Whatever the logic, economists say that the president has been playing with fire, and risks pushing the country to the brink of recession. Turkish corporates are saddled with $295bn of foreign-currency debt that is becoming increasingly expensive to service.
Jason Turvey, an emerging markets economists at Capital Economics, warned that the emergency hike would need to be followed by signs of “a more fundamental shift in policy” after the rollercoaster ride of recent weeks.