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OPINION

Members of parliament scuffle during a debate.

Turkey's crisis is beyond central bank's control

London, January 24, 2014

By Pierre Briançon

Investors' worries over Turkey stem from the economy's structural faults, and Prime Minister Tayyip Erdogan's erratic behaviour.

Foreign investors lapped up Turkey's $2.5 billion eurobond issue even as a corruption scandal swirled and the central bank intervened to prop up the lira. But is this a vote of confidence in its underlying economic health?

After refusing to raise interest rates earlier this week, the Central Bank of Turkey is using some of its small hoard of dollars to support the lira. But the central bank does not have anything which could calm market fears. The roots of Turkey's problems aren't what the CBT calls "unhealthy price formations."

Investors' worries stem from the economy's structural faults, and Prime Minister Tayyip Erdogan's erratic behaviour.

Erdogan has overseen strong economic growth in Turkey since coming to power in 2002, transforming its reputation after a series of unstable coalition governments in the 1990s ran into repeated balance of payments problems and economic crises.

But its politics are an increasing concern for investors.

Turkey suffered last year when talk of eventual "tapering" of the US Federal Reserve's accommodative monetary policy made its higher interest rates less attractive. Investors then remembered the inherent fragility of the country's success story.

Turkey has real strengths, and its progress in the last 10 years is undeniable, but it is increasingly dependent on short-term capital from overseas. Foreign direct investment currently finances less than 15 percent of the current account deficit - which stands at a high 7 percent of gross domestic product.

But the immediate cause of the lira's 10 percent fall against the dollar since December is political, not economic.

Erdogan responded to a widespread corruption probe of leading members of his AK Party with a crackdown on the judiciary and the police. He alleges that the investigation amounts to a coup by a rival Islamist organisation.

The prime minister may be partly right, but some of his statements border on paranoia, mirroring the way he blamed foreign conspirators for anti-government demonstrations in Istanbul last June. His behaviour is raising concerns abroad about the regime's stability and rationality.
Worse, Erdogan doesn't seem willing or able to build a coalition beyond the ranks of his embattled party - even as important elections loom this year.

The CBT would have been well advised to raise rates, but the prime minister's repeated denunciation of a supposed "interest rate lobby," and the nasty turn the debate has taken in the Turkish media, proved powerful deterrents.

So the central bank has basically fired its last salvo. Now it's up to Erdogan to justify his reputation, built over the last decade, as a leader the world could do business with.

The author is a Reuters Breakingviews columnist. The opinions expressed are his own




Tags: economy | Turkey | lira |

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