President Erdogan sacked the well-respected governor of the central bank on 20 March, only two days after the central bank decided to increase its benchmark interest rate by 200 bps to 19% to stem inflation (15.6% in February 2021 according to the central bank). Naci Agbal was replaced by Sahap Kavcioglu – a little-known professor of banking. 


The dismissal of Naci Agbal led to a sharp depreciation of the Turkish lira (cf. graph 1). Indeed, the nomination of Mr Agbal as central banker in November last year was seen as a sign of willingness of the authorities to return to a more conventional monetary policy following years of unorthodox monetary policies that resulted in a large depreciation of the Turkish lira and a sharp drop in foreign exchange reserves. Mr Agbal sharply raised the one-week repo rate (from 10.25% to 19%) during its tenure in order to stem inflationary pressure. Thanks to that more orthodox monetary policy, investor confidence had improved, the lira had appreciated (cf. graph 1) and foreign exchange reserves were no longer under pressure.

Now, the appointment of Sahap Kavcioglu is a source of concern as the professor has unorthodox ideas on how to tackle inflation. He seems to be on the same page as President Erdogan and agrees with his view that high interest rates drive inflation. Given his unconventional view, the market reacted very negatively to his appointment despite his attempt to reassure investors. The Lira dropped drastically and cost of funding rose significantly. 

This recent event could be a new turning point for the Turkish economy and mark a return to old unorthodox measures, which increased, in the past, domestic and external imbalances. This is a source of concern given Turkey’s low level of foreign exchange reserves and heavy reliance on short-term foreign capital flows to finance its large external financing needs. In this context, the imposition of capital controls might not be ruled out. What is more, this reshuffle happens in a global context where US Treasury yields are on the rise. As in the past, increases in US interest rates might lead to more turbulence in capital market. In this context, Credendo is carefully monitoring the external liquidity position of Turkey and the measures adopted by the new central bank governor. Any sharp decrease in foreign exchange reserves could prompt Credendo to review its short-term political risk classification, which is currently in category 5/7. 

Analyst: Pascaline della Faille - P.dellaFaille@credendo.com