Erdoğan's snap economic rethink 'prompted by bleak briefings'

Reuters

President Recep Tayyip Erdoğan's decision to oust Turkey's Central Bank chief this month was made hours after briefings on the fragile state of the economy, a snap judgement that prompted his son-in-law to resign as finance minister, four sources said.

According to the four people familiar with the chain of events, Naci Ağbal was propelled into the Central Bank job after he and other senior members of the ruling Justice and Development Party (AKP) warned the president about sharply depleted foreign reserves.

Their accounts offer important clues to the sudden economic pivot over the weekend of Nov. 6-9. Investors are still trying to navigate what Erdoğan has called a new economic era, with the lira rising 10% on the reshuffle but dropping back 5% this week.

Over at least two days of briefings leading to Erdoğan's decision on Nov. 6, he was also warned about a failure to secure more foreign funding from abroad, and strains from the lira's 30% fall since January and COVID-19, the sources said.

Alarmed, the president summoned then-Central Bank governor Murat Uysal on the same day to ask how net FX reserves had fallen by more than half this year and his plan to restore the buffer.

The drop is recorded in public Central Bank data so cannot have been a surprise, but the sources said the chat convinced Erdoğan that Uysal must be replaced.

"Uysal's removal and Ağbal's appointment happened in a matter of hours," one of the sources, who is close to the AKP, said. All the sources requested anonymity because they were not authorized to speak publicly.

The presidency declined to comment on Erdoğan's meetings ahead of Uysal's dismissal, which was announced in the early hours of on Nov. 7 with little explanation. Uysal was not immediately available to comment.

On Nov. 8, Erdoğan's son-in-law Berat Albayrak abruptly resigned from his position as finance minister - a political earthquake for a powerful figure once seen as a potential successor to the president. Albayrak could not be reached for comment.

A second source said Erdoğan had been told of the concerns of business leaders about a "major wave in unemployment" once the government lifts a coronavirus-related ban on layoffs.

Last week, the Central Bank under Ağbal delivered a 475-point rate hike, its sharpest in more than two years.

Yet the currency's weakness this week suggests Erdoğan may need to do more to show he is serious about his Nov. 11 promise of market-friendly economic reforms.

'The president has been misled'

After years of blaming high interest rates and foreign investors for the economy's ills, Erdoğan said both would now be embraced.

Economists have said it was Erdoğan's repeated calls for low rates that limited the Central Bank's ability to battle inflation, and prompted it to tap dollar reserves to support the currency.

Three of the sources said the president had been misled.

"Erdoğan was really not informed consistently about the economy. He was always given polished information from one side," the first source said. A third source said that in the past he was promised reserves would rebound along with the lira.

Albayrak's resignation, in a note posted on Instagram, was not confirmed by the presidency for more than 24 hours.

He cited health reasons, but his departure came after he was not invited to two weekend meetings chaired by Erdoğan and the vice president, the second source familiar with the matter said.

The finance ministry declined to comment on the quick overhaul, in which Lütfi Elvan, another AKP stalwart, replaced Albayrak.

The fourth source told Reuters some formerly influential party members had recently felt "resentful and sidelined" but now have "more active roles."

The pivot came ahead of new restrictions imposed last weekend to rein in the coronavirus that are expected to slow the economy, and after Joe Biden's White House victory, which foreshadows tougher U.S. ties for Turkey.

Influential voices convinced Erdoğan that "calamity is near," said GlobalSource Partners analyst Atilla Yeşilada. They "forced him to reassess the conditions on the ground and the chances of his regime surviving through the winter."