Erdoğan’s economic interventions are repelling foreign investors

Turkish President Recep Tayyip Erdoğan’s micro-managing of markets is making it hard for foreign capital to trade and invest in Turkey, according to economist Tim Ash.

Ash said that Turkey should be an attractive prospect for foreign investors with relatively low budget and current account deficits, a strong banking sector, excellent growth potential, and favourable demographics, among other factors.

“And yet despite all the above, investors are still hanging back from investing in Turkey – indeed, they continue to reduce exposure to Turkish local markets,” P.A. Turkey cited Ash as saying on Thursday.

Ash said that, while geopolitical concerns are a factor, monetary policy is at the core of the issue.

“At the heart of the problem is the political economy. And economic policy is Turkey is driven by the political and electoral cycle – and the Erdoğan administration is almost always in election mode,” Ash said.

“It always feels the need to deliver growth to create jobs and the feeling of prosperity to underpin its electoral support. And historically growth has been driven by credit – and lots of it – and most of this has been foreign funded,” he added.

But he said what has changed is that Turkey’s central bank has begun relying on using domestic foreign currency savings in the form of the weight of FX deposits in the banking system.

“The CBRT (central bank) and Turkish policy makers seem to think they can use smoke and mirrors to deceive when it comes to the impossible trinity to deliver a stable currency, high growth and low inflation,” he said.

The central bank is recycling the large/rising stock of local FX deposits, through state-owned banks to defend and anchor the exchange rate, in order to to cut policy rates to spur high real GDP growth and get a political dividend at the polls.

“But while growth might be rebounding, high and sticky inflation is a reflection of the fact that the policy is not really working, and continued dollarization and capital flight by foreign portfolio investors is evidence of this,” he said.