President Erdogan dismissed the governor of the country’s central bank, Mr Uysal, who failed to stem lira depreciation and appointed Mr Agbal, a former finance minister, as new governor. Over the same weekend, the Finance Minister, Mr Albayrak, resigned citing health reasons. Mr Albayrak is the son-in-law of President Erdogan and he was seen as a potential successor to Mr Erdogan. The lira appreciated following the news.


Over the last few months, the lira has been under severe pressure (cf. graph 1 where an increase represents a depreciation) and reached record lows. Despite a double-digit annual inflation rate (of 11.89% in October 2020) and a heavy exchange rate depreciation, Mr Uysal was very reluctant to increase interest rates, partly under Mr Ergodan’s pressure. The President is indeed a lifelong opponent of high interest rates. Instead, the central bank kept its benchmark interest rate low to boost economic activity and used its gross foreign exchange reserves to stem lira depreciation. As a result, the gross foreign exchange reserves have decreased sharply this year as shown in graph 2.

The markets reacted positively to the news and the lira appreciated strongly. However, the true test will come in the forthcoming Monetary Policy Committee meeting, to be held on 19 November, and after. Indeed, despite sound but deteriorating central government finances, the economic situation of Turkey remains precarious. The economy has been hit hard by the sharp contraction in economic activity in the Eurozone, one of its main trade partner, as well as by the sharp drop in tourism and covid-19 related containment measures. In its October World Economic Outlook, the IMF forecasted a real GDP contraction of 5% in 2020. Moreover, the corporate debt (of 68.9% of GDP in Q1 2020) is high and largely denominated in foreign currency. The creditworthiness of corporates is thus expected to deteriorate in a context of negative growth, exchange rate depreciation and rising financing costs. This will inevitably deteriorate the asset quality of the banking sector as corporates are largely financed by local banks. Last but not least, the country has very low gross foreign exchange reserves and high short-term external obligations arising from the (moderate) current account deficit (expected to reach -3.7% of GDP this year) and the very high short-term external debt. The weak liquidity largely explains why Credendo classifies Turkey’s short-term political risk in category 5/7. 

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