Is it time to quit as central bank governor if the president of your country suggests you could be a foreign agent? The answer to this not necessarily run-of-the-mill question may well help determine Turkey’s economic prospects.
On Wednesday, President Recep Tayyip Erdogan all but accused Erdem Basci, the central bank chief, of working for Turkey’s enemies.
“You are fighting for independence from us but do you depend on somewhere else?” the president asked in a speech referring to the formally independent central bank. “Tell me this.”
Erdogan’s complaint against the bank is that it is cutting interest rates insufficiently – even though inflation is above target, the lira has been flirting with all-time lows and the bank had cut its overnight rate by 50 basis points the day before.
Indeed, just as the president spoke, the bank was seeking to convince investors at a meeting in Ankara that its decision to shift from a “tight” to a “cautious” monetary policy was based on broad economic trends, not political pressure.
Erdogan’s remarks bring up at least two big issues. The first, as he seeks to establish an executive presidency to bolster his rule, is whether he sees independence from the government (and the voters’ will) as akin to treachery.
The second is how long the status quo of current economic policy-making will last. To be clear: people like Basci and his childhood friend deputy prime minister Ali Babacan appear to see their job as “damage control”. Basci said as much in a speech last year.
The damage control in question may largely consist of protecting Erdogan against himself – for Turkey’s sake. If, for example, the president was to have his way and interest rates were slashed by 200 basis points or more, it is hard to see how that would be a positive for the Turkish economy.
Such a move could well send the lira substantially lower against the dollar, making it much more difficult for Turkish corporates to service their more-than-$170bn in hard currency debt and pay for dollar-denominated raw materials and intermediate goods.
After Erdogan’s speech, Babacan went to see prime minister Ahmet Davutoglu for two and a half an hours on Wednesday evening and Basci was absent from work for at least part of Thursday.
The official line is that none of this was connected with Erdogan’s declarations: Babacan was briefing Davutoglu (who also upbraided the bank on Wednesday, albeit in milder tones) and Basci, recently reported to have moved out of an official bank residence, was having a medical check.
When an MP asked in parliament if the two men had resigned, Taner Yildiz, energy minister, gave a categoric denial. Erdogan himself surely knows that a large part of his unprecedented electoral success is based on his economic record, to which Babacan has greatly contributed.
To much of the outside world, the possible consequences of a Babacan/Basci sudden exit are all too clear. “If Babacan or Basci are forced out by the Erdogan loyalists I think the market reaction would be severe and brutal,” wrote Timothy Ash of Standard Bank.
So the question remains: how much can a central bank governor (or deputy prime minister) take?
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