Turkey Currency Crisis Threatens Economy, Posing Challenge to Erdogan Rule
A currency crisis is shaking Turkey’s economy, imperiling President Recep Tayyip Erdogan’s nearly two-decade-long grip on power and upending living standards in a country that had enjoyed years of growth.
The lira weakened against the dollar on Thursday, trading at a record 10.98 compared with 10.57 earlier in the day, after the country’s central bank cut its key rate to 15% from 16%.
The currency has lost nearly 8% of its value since Monday as Mr. Erdogan reiterated a demand for lower interest rates as a part of his unorthodox strategy to spur economic growth.
But pressure on wages and the rising cost of basic goods such as food, medicine and energy have eroded Mr. Erdogan’s support base in Turkey, presenting one of the most serious challenges he has faced in his time ruling the country as both prime minister and president. Mr. Erdogan’s approval rating dropped to 38.9% in October, down 2.5 percentage points from the previous month, according to MetroPOLL, a leading Turkish polling outfit. Turkey’s two top opposition leaders called on Wednesday for an early election amid the growing turbulence in the economy.
Mr. Erdogan has pushed back against critics of his handling of the economy. Earlier this week he said, “We wrote the book on the economy and continue to write it.”
The lira’s slide is the latest turbulence to hit the Turkish economy after years in which Mr. Erdogan has repeatedly intervened at the central bank to install officials who support his demands for lower interest rates. He has fired three central-bank chiefs in three years and replaced other top officials.
“It’s just crazy, there’s zero justification for this move as there’s been zero justification for the rate cuts we’ve seen so far this year,” said Tim Ash, an emerging markets strategist at BlueBay Asset Management. “Erdogan is running monetary policy on his own,” he added.
The central bank’s repeated rate cuts have added to inflationary pressures in Turkey. Inflation reached nearly 20% in October, according to official measures.
Economists and investors are increasingly concerned that rapid inflation could pose risks for the broader economy. The weakening currency makes it harder for Turkey to repay its foreign debts. Ankara must repay or renew debts equal to about a quarter of its gross domestic product over the next year.
“It’s on a destabilizing path if this continues,” said Erik Meyersson, a senior economist at Swedish bank Handelsbanken.
The lira is the worst-performing major emerging-market currency of the year and is on course for its ninth consecutive year of declines, down about 30% this year. Investors say they have lost confidence that the central bank would be able to increase interest rates to a level near or above inflation.
Usually central banks raise interest rates to fight inflation, since it makes borrowing more expensive, slowing down the economy and reducing demand for goods and services. Higher rates also attract capital into an economy, strengthening the currency and causing the price of imported goods to drop.
The speed of the lira’s slide is reminiscent of the 2018 currency crisis, in which the lira fell by almost a third. A rapidly weakening currency is likely to further boost inflation, as necessary imports such as food and oil become more expensive to buy in the local currency.
Lack of confidence in officials to effectively control inflation is spurring locals to switch lira for foreign currencies. Over half of the deposits in Turkey’s banking system are held in foreign currencies, according to central-bank statistics.
Turkey’s economy has also experienced turbulence in recent years because of a failed military coup in 2016, instability resulting from wars in neighboring Iraq and Syria, and a downturn in tourism during the pandemic.
By Jared Malsin and Anna Hirtenstein