Sun, 11/08/2020 – 13:25
“I decided not to continue my duty as a minister after five years in office due to health reasons,” Albayrak’s statement read. “I’ll spend my time with my mother, father, wife and kids, whom I have neglected for many years out of necessity.”
Moments later, Albayrak deleted his twitter account.
According to Bloomberg, Turkey’s treasury ministry confirmed Albayrak’s bizarre resignation.
Albayrak has been in cabinet since 2015, when he served as the minister of energy (covering the period when Turkey was allegedly importing oil from ISIS in Syria) until he took over the government’s top economy position in 2018.
The resignation of Turkey’s top finance professional follows just a day after late on Friday president Erdgoan unexpectedly fired the country’s central bank head, Murat Uysal, who was appointed by Erdogan in July 2019 with a clear mandate to cut rates despite the country’s soaring inflation. And cut rates he did, slashing the official rate by 16 points from 24% to 8%, before having no option but to hike rates in September…
… to slow down the collapse in the Turkish lira…
… which had lost more than 30% YTD, making it the world’s worst performing currency.
The question now is just how bad will the investing community take the weekend’s one-two punch which hints that a major financial and economic crisis is imminent in Turkey, and in just a few hours they will get to cast their verdict by either selling the Turkish lira by a lot… or a whole lot.
As Bloomberg notes, for most traders, Uysal’s sudden replacement by former Finance Minister Naci Agbal “is unlikely to stem the lira’s losses unless monetary policy takes a more hawkish turn. Inflation is in double digits, the country is running a current-account deficit and foreign reserves are being eroded.”
However, the main reason Erdogan fired Uysal’s predecessor is because he refused to cut rates when all indicators said he should hike. “We fired the previous central bank governor because he wouldn’t listen and we have decided to move on with our new friend,” Erdogan said last year, and told the new governor that “we are going to lower interest rates.”
Well, the new governor hiked rates just once and is now history, which is why we said on Friday that “Erdogan’s action will trigger a new and even more acute crisis for the Turkish lira, now that it is clear that Erdogan will resume another aggressive rate cut cycle. Only instead of sparking growth, the imminent rate cuts will end up destroying any “carry” currency value the Turkish lira may have had to western investors, leading to what will be a historic dump, perhaps as soon as Monday.”
Others agree: according to Hasnain Malik, the head of equity strategy at Tellimer, a Dubai-bsaed EM research firm, “The lira likely has more to fall.” He added that “the stealth tightening already under way is an admission that inflation has to be addressed” which “means sizable rate hikes sooner or later, regardless of which personality heads the central bank.”
In theory yes, but there is the very clear possibility that Uysal was fired precisely because of his hawkish bias. As a reminder, Erdoganomic is based entirely on the premise that high interest rates cause inflation, which is why it is our view that what is about to happen is far greater devaluation in the lira.
Goldman also agrees that there is more downside, writing that the appointment of a new central banker is unlikely to alter trends in the currency, inflation and reserves “if they are not followed by significant changes in policy” to wit:
Judging from the comments of the Treasury and Finance Minister Albayrak, there appears little appetite to rein in TRY depreciation for reasons other than financial stability concerns. Instead, a weaker TRY is seen as supporting the rebalancing of the economy towards less dependence on foreign financing. In our view, this strategy comes with risks that domestic confidence is undermined in a way that would be costly to reverse, and result in a hard landing for the economy. We think these appointments are unlikely to alter the current trends of inflation, reserves and the TRY by themselves, if they are not followed by significant changes in policy.
A possible Biden victory in the U.S. presidential election is unlikely to do the lira any favors either, as traders have already voiced concerns that U.S.-Turkish relations will cool under the new administration. The Turkish government faces possible U.S. sanctions over the purchase of a Russian missile system; as a reminder after initially feuding, Trump and Erdogan had developed a peculiar camaraderie over the second half of Trump’s term, which provided an implicit boost to foreign sentiment of the country.
On Friday, when discussing the termination of the central bank head, we said that “we expect this to be the first salvo in what ultimately culminates as a full-blown currency crisis for the Turkish nation, and while Erdogan may try to impose capital controls, it won’t last for one simple reason: the Turkish central bank is almost out of FX reserves.”
The second salvo came moments ago with the unexpected resignation of Albayrak, who was one of the few anchors of foreign investor confidence in the country. With him gone, all the worst fears about the Turkish economy are about to come true.
Our only question is on which side of 10.00 does the USDTRY – which on Friday closed at 8.50 – open for trading in just a few hours.
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Author: Tyler Durden