The consequences of Recep Tayyip Erdogan's decision are still wreaking serious havoc on the Turkish economy

Turkey's economic earthquake persists after central bank governor's sacking

photo_camera REUTERS/MURAD SEZER - Turkish President Tayyip Erdogan speaks during a meeting to announce an economic reform package, in Istanbul, Turkey, March 12, 2021

Naci Agbal has left his post at the head of the Central Bank in what some experts, such as Timothy Ash, prestigious analyst at Bluebay Asset Management, have described as "a truly idiotic decision". This is yet another sign of the scant - not to say absolutely nil - independence of the economic power with respect to Recep Tayyip Erdogan's executive, which has taken just four months to remove its third governor of the Central Bank in less than two years. Sahap Kavcioglu will take over the post, to the surprise of investors, economists and experts in the sector, as he is a man with little experience in the sector.  

One of the main reasons for Agbal's dismissal was to raise the interest rate from 17% to 19% in an attempt to stabilise the Turkish lira. After his departure from the central bank, the situation has only worsened. The Turkish lira fell sharply on Monday, losing 9% of its value in just a few hours. Moreover, the Istanbul Stock Exchange was forced to halt trading on two occasions, experiencing losses of more than 9%. This trend continued into Tuesday morning, when trading was suspended again, despite having regained some stability on Monday night. 

Erdogan's belief in interest rates is once again weighing on the Turkish economy. Contrary to all economists, he believes that higher interest rates lead to higher inflation. This argument, which is beyond the experts' comprehension, seems to be yet another smokescreen in what would appear to be a mere attempt to get the central bank under more control. Kavcioglu seems to be more in line with the regime's ideology, which, together with his good relationship with the president, would allow him to have more power - perhaps not as much as he would like - in the economic body. 

El exgobernador del Banco Central de Turquía, Naci Agbal

While it is true that the COVID-19 pandemic did not hit Turkey's economy too hard, the local currency has now entered its eighth consecutive year of decline, according to data provided by Bloomberg. In 2020 alone, it lost 25% of its value to around 7.25 lira to the dollar. The current figures are even more disastrous, reaching almost 8 lira to the dollar, as a result, among other things, of Erdogan's continuous interference in the economic sphere.

The Turkish economy has not been the only one to suffer the consequences of the dismissal of the central bank governor. BBVA itself opened the week with losses of almost 8%. The bank's acquisition of $60 billion in assets from the private bank Garanti - an entity headed by Carlos Torres - has led to a large exposure to Turkish debt. However, BBVA has already written off about 75% of its investment due to the fall in the share price and its devaluation. 

El nuevo gobernador del Banco Central de Turquía, Sahap Kavcioglu, sentado en su oficina en Ankara, Turquía, el 21 de marzo de 2021

The view from outside Turkey's borders is very negative regarding the change of governor, as it is seen as a new obstacle to Erdogan's economy. Bankinter assures that "Turkey's fundamentals are weak and the foreseeable change in monetary policy is a new obstacle". They expect the new monetary policy to be much looser and closer to Erdogan's wishes against raising interest rates. On top of this, Turkey is currently one of the countries in the world with the most negative inflation figures of all - 13.6% in February - as well as unemployment - also 13.6% - and a current account deficit of -5.2%/GDP. 

Los clientes esperan frente a una agencia de cambio de divisas mientras una pantalla muestra los tipos de cambio cerca del Gran Bazar, en Estambul, el 22 de marzo de 2021

A complex situation that the new governor, Sahap Kavcioglu, will have to deal with, and which they hope the outside world can overcome with a certain independence from the decisions that Recep Tayyip Erdogan may take. However, forecasts point to the opposite and the president will have greater weight in the Central Bank, which, experts say, could end up completely dynamiting the Turkish economy.

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