Our Analytics 16 december — 16:04

Erdogan's vision turned out to be true: Turkish economy strengthened (Our comment)



A few days ago, the Central Bank of Azerbaijan (CBA) lowered the discount rate for the eighth time since the beginning of this year. We conducted an appropriate analysis, in which we indicated the motives behind this decision. The world central banks, as if competing with each other, are cutting rates, trying to help their economies in the face of increasing global competition. But in different countries, depending on the state of the economy and the course of development of its various components, this process occurs in different ways. This is especially noticeable in comparing the rate of decline in rates in Azerbaijan and fraternal Turkey.

The Central Bank of Azerbaijan, as we know, has halved the discount rate in two years twice: from 15% to 7.5%. That is, the process of lowering the discount rate took place quite smoothly, which did not lead to sharp jumps in other areas of the country's economy. And this was done without pressure from above, it was felt throughout that the process was proceeding smoothly, in full coordination with other departments. True, many criticised the banking system, which, without heeding the efforts of the CBA to lower its lending rates, was not in a hurry to follow the same path. But today it can already be argued that this policy has yielded results: bank loans have fallen in price noticeably, which had an impact on the financing of the economy.

The Central Bank of the Republic of Turkey (CBRT) almost simultaneously also lowered its key rate by 2%: from 14% to 12% per annum. This is the fourth key rate reduction in five months. On July 25, the CBRT lowered the key rate by 4.25% from 24% to 19.75% per annum, on September 12 the rate was reduced by 3.25%, and on October 24 by 2.5%. If you carefully consider these figures, it is easy to notice that the Turkish Central Bank also halved its rate, but in just five months. The rate of decline, frankly, is record-breaking and almost five times higher than in Azerbaijan. And this happened in a rather difficult situation, when the country's President Recep Tayyip Erdogan literally snapped, crackled and topped, while the head of the CBRT Murat Cetinkaya continued his line, insisting that lowering the rate in this situation could lead to collapse.

But Murat Cetinkaya was fired in July this year. The corresponding decree was signed by President Erdogan, explaining his decision by the fact that he did not comply with the instructions to reduce the key rate. Indeed, last year in Turkey, the national currency, the lira, plummeted. In this regard, the CBRT in September 2018 sharply increased the key rate immediately by 6.25%: up to 24% per annum. It should be noted that, in the unanimous opinion of experts, such a move contributed to the temporary strengthening of the lira.

Erdogan insisted that this 'difficult rock' - Murat Cetinkaya - would destroy the economy

But the head of state insisted that Cetinkaya's stubborn position (his surname is translated as 'Difficult Rock') would ruin the economy. In short, the new chairman of the CBRT is his former deputy Murat Uysal, who either did not want to resist Erdogan's demands, or even supported his position before that. And the key rate slid sharply down. The new head of the Central Bank of Turkey launched an unprecedented rate reduction cycle just a few weeks after he took office in July. And, we must pay tribute to him, almost completely offset the rate increase undertaken by the previous leadership of the CBRT in response to the currency crisis.

Moreover, the Turkish government, unlike Azerbaijan, invited banks to independently solve their debt problems. And it was necessary to restructure loans for 36 billion dollars. A total of 400 billion lira ($72 billion) of bad loans were collected, half of this amount was reorganised. But the state unequivocally replied that it was not going to cover losses on 'bad' loans. Minister of Finance Berat Albayrak simply noted that the economy will be better when the issue of balance is resolved. 'Some say that the government should cover losses. This will not happen. The banking sector should not go the easy way,' he said. Although the government was already working on legislation to simplify restructuring negotiations between lenders and borrowers, the economy was trying to recover from the recession. Erdogan's administration unequivocally sought to increase lending, even despite an increase in bad loans and lower profits in the banking sector.

Erdogan's vision turned out to be true

Such 'synchronous' work on the verge of a foul between the government and the Central Bank led to the stabilisation of the lira exchange rate. But President Erdogan's calls for more active monetary easing do not stop. The rate of the Turkish lira after the last decision of the CBRT at the rate added immediately 0.3% paired with the US dollar, it was trading at 5.7874 lira compared to 5.8035 lira at the close of the previous session. But quite recently, this figure reached an alarming level when the value of the dollar exceeded 7 lira. But Erdogan, speaking before each meeting of the Central Bank after the appointment of Uysal, said a few days ago that he expects to reduce the rate to a single-digit level already in 2020. And if the CBRT manages to maintain the rate of decline in its rate, it seems that it is quite capable of achieving the task set by the head of state.

Yes, in terms of its ability to withstand the depreciation of the lira, the Turkish banking system is now in better shape over the past few months. The foreign exchange assets of private banks, according to the latest regulator data, exceed similar liabilities by $3.6 billion, which is close to a record high. And the deficit of assets in hard currency in state-owned banks, which overshadowed their position over the past year and reached several billion dollars, fell to $300 million.

All this once again proves that there are no general rules for solving certain problems, including in the economy. Each country must choose the only path right for itself, no matter what difficulties it experiences, whatever barriers to solving these problems are put.

Indeed, many world renowned experts predicted the collapse of the Turkish economy, especially after Erdogan's direct intervention in the affairs of the Central Bank. But his vision turned out to be true, the Turkish economy has strengthened along with the lira. Likewise, many opposition experts were distrustful of the reforms of Azerbaijani President Ilham Aliyev. But there are fewer such critics: the reforms are showing themselves so vividly that it is impossible not to see them.

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