Turkey’s presidential election run-off takes place this Sunday with the incumbent, Recep Tayyip Erdoğan, likely to win the election. He has not left victory to chance, practising monetary and regulatory manipulation right up to polling day to delay an all-too-possible financial crisis till after his return to office.
Erdoğan has subverted monetary policy for more than a decade now by leaning heavily on the central bank to hold down rates despite rocketing inflation, which hit a 24-year high above 80 per cent last October. He has tried to relieve the inevitable downward pressure on the exchange rate with an increasingly baroque series of interventions. Last week, it was revealed that Turkey’s gross foreign exchange and gold reserves dropped by 15 per cent in the six weeks leading up to the first round of voting on May 14. Net of borrowing from banks, the reserves are perilously near zero.
Among other expedient fixes, his government has tried to stop investors fleeing into dollar-denominated bank accounts by compensating holders of lira-denominated bank accounts against falls versus the dollar, thus building up dollar liabilities for the public sector. Most emerging market governments have tried to reduce dollar-denominated liabilities — India and Brazil’s sovereign debt is now almost entirely in local currency — but Turkey’s have been rising.