Erdogan crackdown slams brakes on Turkish recovery

Tayyip Erdogan’s anti-democratic tendencies are hardly a secret. It may seem surprising then that the detention of a key political rival to the Turkish president prompted a sharp currency selloff on Wednesday. The reason for the large drop is that investors have been busily buying into a normalisation of the economy thanks to more orthodox monetary policy in recent years. Erdogan’s moves arguably interrupt that process.

Authorities on Wednesday detained Istanbul mayor Ekrem Imamoglu, a key figure in the opposition Republican People’s Party, which said it was a “coup attempt against the next president”. It’s part of a wider crackdown on Erdogan’s potential political rivals. Human Rights Watch characterised the charges against Imamoglu as “politically motivated and bogus”, according to Reuters.

The Turkish lira fell to about 39 per U.S. dollar by 1000 GMT, compared with trading levels of roughly 37 for most of Tuesday, while the BIST 100 Index of stocks dropped almost 7%. The biggest fallers included banks like Yapi Kredi YKBNK, Isbank ISATR and Akbank AKBNK, which were all down roughly a tenth. The yield on 10-year Turkish sovereign bonds, meanwhile, rose by 2 percentage points to 28.4%.

There are many reasons for investors’ freakout, aside from a general uptick in Turkish political risk. One fear, for example, might be that the moves raise the odds of a more entrenched Erdogan turning back to the populist economic policies of the past, like favouring unsustainably low interest rates. That would represent a harmful U-turn from investors’ perspective, since relatively orthodox monetary policy in recent years has served the economy well.

Year-on-year consumer price inflation has been dropping – to about 40% in recent months, compared with around 60% to 70% in the first half of last year, allowing the Turkish central bank to start bringing rates down from last year’s 50% level. The lira’s plunge on Wednesday threatens to reverse that process, by stoking further price rises and forcing ratesetters to potentially hike again.

There’s also a risk that foreign capital inflows reverse. Capital Economics analysts reckon that 2024 saw a sharp surge in net purchases of Turkish bonds by non-residents, to the tune of several billion dollars per month at times, which now looks unlikely to continue after Wednesday’s plunge. In other words, the main victims of Erdogan’s crackdown are clearly his political rivals – but there are economic questions at stake too.

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CONTEXT NEWS

Turkish authorities on March 19 detained President Tayyip Erdogan’s main political rival, Istanbul mayor Ekrem Imamoglu, on charges including corruption and aiding a terrorist group, Reuters reported. The key opposition party called it “a coup against our next president”.

The Turkish lira fell to roughly 39 per U.S. dollar as of 1000 GMT on March 19, compared with its trading levels of less than 37 for most of the day on March 18.