Is political turmoil taking a toll on Türkiye’s economy?

CGTN Europe

CGTN Europe interviewed Timothy Ash, Economist at BlueBay Asset Management

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00:00Turkey's Central Bank has announced a raft of new measures to prop up the markets and

00:05the Turkish Lira amidst the ongoing uncertainty. Let's get more on that now with Timothy Ash,

00:11economist at Blue Bay Asset Management. Timothy, thank you very much for joining us. This comes

00:15after a meeting with commercial lenders on Sunday and includes a ban on short selling.

00:20Will it be enough?

00:21Well, it's one of many measures, as you've mentioned. I mean, the positive for the Central

00:28Bank is, you know, they came into this crisis with a real wad of foreign exchange reserves,

00:34about 160 billion dollars gross reserves. That's a lot of ammunition to defend the currency.

00:41Also today, interestingly, Erdogan came out with strong supportive words for Simsek, that's

00:46the finance minister, and the team at the Central Bank. And they have, I think, a mandate

00:52to do whatever it takes to stabilise the currency and stabilise markets. That could mean raising

00:56interest rates. The benchmark rate has been reduced in recent months, but we could see

01:02that increased in defence of the currency.

01:04Well, let's maybe talk about interest rates in a moment. What impact do you think that

01:08the political unrest continuing will have on foreign direct investment?

01:13Well, there's two things here. There's foreign portfolio investments, which is foreigners

01:19buying stocks and bonds. And then, as you mentioned, foreign direct investment, that's

01:22companies, you know, building factories in the country, in Turkey. We've seen portfolio

01:29inflows return to Turkey over the years, not to the record levels we saw a decade or more

01:36ago, but kind of significant levels and probably around 50 billion dollars worth. Significant

01:41amounts have left in the last week, frightened by this move. But the Central Bank has used

01:47reserves to cushion the outflow. Now, if we see some kind of normalisation on the politics

01:54front or demonstrations moderate, and if we see the Central Bank do the orthodox things

02:00in terms of raising rates, et cetera, that money could come back quite easily, I think.

02:06The more difficult one is foreign direct investment. People, when they build factories in countries,

02:11they're more concerned about rule of law, long term political stability. And I guess

02:15that's been hurt by the end. So I think foreign direct investment, I think, will further slow.

02:21Actually, interestingly, the peak of FDI, foreign direct investment, was, I think, in

02:26about 30 billion dollars a year. And it's been down to around five billion recently.

02:32And that's probably going to go lower as a result.

02:36And where do you think this does leave interest rates? And is President Erdogan

02:39willing to risk another economic crisis for political reasons?

02:46Well, it depends what you mean by economic crisis. A currency crisis, which results in

02:53high inflation. I think he doesn't want that. I mean, I think if you look at the results of the

02:59last year's local election, it was really about inflation. I mean, the ruling party,

03:04the AKP, got a drubbing across the country because people were fed up of high inflation.

03:09And I think what he learned from that was that he needs to address those inflation problems.

03:15And he appointed a team, Shimshek and the guys at the Central Bank, to address those

03:20issues. They raised rates. We've seen some progress in terms of reducing inflation.

03:25It's been on the right track. Obviously, this has put that effort out of kilter a bit.

03:30But I think, you know, policies that, you know, a failure to address the challenges,

03:38the market challenges in the short term, if they resulted in a big FX adjustment

03:43and high inflation, I think that would be terminal to Erdogan's re-election chances anyway.

03:48So he can't really let the currency go. He's got to continue to support the orthodox

03:52monetary policy run by Shimshek and the team at the Central Bank. He has really no option.

03:57Great to get your insights today. Thank you very much indeed,

03:59Timothy Ash, economist at Blue Bay Asset Management.

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