Investors are right to be rattled by Turkey’s central bank purge

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The gradual erosion of institutional credibility could prove more damaging to Turkey than economic and political shocks.

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Murat Uysal, Turkey's new central bank governor


As autocrats around the world are well aware, emerging-market investors love stability. Give them a competent strongman with a dubious human rights record over a chaotic democracy any day.

A notable beneficiary of this phenomenon in recent years has been Recep Tayyip Erdogan, Turkey’s authoritarian president.

His firm grip on power – along with excellent demographics and a sturdy banking sector – has helped persuade investors to keep faith with Turkey through an attempted coup, successive stand-offs with Russia and the US, and last summer’s currency crisis.

So far, so good for the Turkish economy – if not for the academics, journalists and others who have got on the wrong side of the regime.

Confidence

The only problem is that investors don’t only prefer continuity in the presidential palace – they also want to see it in key institutions.

They like to see the same faces on roadshows and to get to know officials. Above all, they want to be confident there are at least one or two steady hands at the helm of the economy and that not all key policymakers are political placeholders.

Until Erdogan’s victory in presidential elections in June 2018, this was more or less the case in Turkey. The first signs of change came the following month, with the appointment of Erdogan’s son-in-law, Berat Albayrak, as minister of finance.

Unease about the president’s choice was confirmed by Albayrak’s lacklustre response to Turkey’s economic slowdown last autumn, and even more so by his feeble performance at a key investor meeting in Washington in April.


The highest-profile sacking, and possibly the most ill-advised, was that of long-serving chief economist Hakan Kara 

Next to come under attack was the central bank. At the start of July, governor Murat Cetinkaya was sacked barely three years into his term.

Cetinkaya’s aversion to outright rate increases – presumably a response to Erdogan’s oft-repeated conviction that high interest rates cause inflation – meant he had never been a favourite with investors.

Indeed, his reluctance to hike in response to rising inflationary pressures was widely seen as the precipitating factor in last summer’s currency meltdown.

Nevertheless, investors were rattled when he was removed from his post – the first time a central bank governor has been fired in Turkey since the 1981 military coup – and even more so when his successor Murat Uysal promptly slashed rates and promised further cuts.

Purge

Further cause for concern came a month later, in the form of Uysal’s purge of senior central bank officials. On August 8, the heads of five departments – including banking, research and risk management – were removed.

The highest-profile sacking, and possibly the most ill-advised, was that of long-serving chief economist Hakan Kara. Not only was Kara well-respected for his intelligence and his work, he was also – as the regular host of foreign investor meetings – the face of the institution for visitors from overseas.

At a time of ongoing market volatility, when Turkey urgently needs to reassure investors of its ability to keep the economy on an even keel, this type of arbitrary and unnecessary change is damaging.

The Turkish economy has shown a remarkable resilience to cataclysmic shocks. What it may not be able to survive is the slow erosion of institutional credibility.