Investors in Turkey “need plain vanilla central banking and not some big Erdoganite economic experiment based on little/weak economic foundations”, BlueBay Asset Management strategist Timothy Ash said in a note on May 15.

His comments came after Turkish President Recep Tayyip Erdogan earlier in the day gave a “market unfriendly” Bloomberg TV interview in London, offering no indication that he will accept the embattled and overheating Turkish economy needs tightening rather than loosening and indicating he will play a greater role in setting monetary policy if he is kept in power by the June 24 snap election. After the interview, investors dumped the Turkish lira (TRY), sending it to a fresh all-time low. By May 16 at around 12:00 local time, a dollar was fetching an unprecedented TRY4.5011.

Ash, who referred to the Turkish president’s interview as “Erdogan unleashed”, wrote: “I think in the Bloomberg interview his comments on interest rates and central bank independence were pretty clear cut. He wants to cut policy rates—which kind of goes against what Moody's, the IMF, S&P and I think most market commentators are now suggesting in response to what seems to be clear evidence of overheating in the Turkish economy.

“He also argued against classic interest rate theory that when faced by rising inflation, rates need to be increased. He argued that high interest rates cause inflation. Now maybe in stagflating DM economies there might be some logic to go against orthodoxy, but certainly not in Emerging Markets. And surely at times like this with the lira under the cosh, with a large current account deficit and external financing requirement/gap, now is certainly not the time for experimentation.”

Ash added that Erdogan should “at least [be given the] credit for saying what he thinks—revealing his true thoughts on the economy and interest rates. Actually in some respects it is refreshing—as normally policy makers when they meet investors tell them what they want to hear, even if they know actual policy delivery is unlikely in practice.”

The strategist also considered the question of why Erdogan felt the “need to come to London and send such a market unfriendly message to investors?" He concluded: "The answer I guess is that the message was not meant for the foreign audience but the local audience [in advance of the June 24 early elections in Turkey]. He wanted to send the message that he still has allies in the UK, and particularly the May government, but also that he will not be browbeaten by the market in terms of views. Erdogan has conviction in his views that high interest rates cause inflation, and are anathema to his constituency, and he was happy, almost proud to explain those views to foreign investors. But I guess he assumed that talking tough to foreign investors in London—the interest rate lobby—would still go down well with his core constituency in Turkey.”

Moody’s: Turkey among countries more vulnerable to investor sentiment
Also on May 15, Moody’s Investor’s Service reiterated that Turkey’s economy is overheating and a lack of effective monetary-policy response to increasing inflationary pressures is affecting the central bank’s credibility.

“When we look at emerging markets at large, some countries are more vulnerable to shifts in investor sentiment and Turkey comes to mind because of its dependence on foreign capital inflows as a source of fuel for its economic growth,” Yves Lemay, managing director for sovereign risk at Moody’s, said in an interview with Reuters in London.

He added: “This vulnerability is something that informed our decision in March to lower the rating on Turkey to Ba2 as well as the ongoing erosion of the institutional strengths leading to concerns about the effectiveness of policies and predictability of the reaction function of government. We have previously highlighted this erosion of credit strength, which has manifested itself by the interference of government authorities in the conduct of monetary policy.”

Lemay noted that one credit positive for Turkey that has been a source of support for its rating was relatively healthy balance sheets of the government, where the debt-to-GDP level is below 30% versus the median of close to 50% for Ba2-rated sovereigns.

“When we lowered the rating back in March, we did point to increased external vulnerability to external shocks or an increase in the risk of a balance of payments crisis, but a Ba2 rating still suggests a very low probability of this event risk crystallizing,” he added.