As the lira plunged on Friday, Berat Albayrak stood up to face a challenge that would daunt the most seasoned finance minister.
Turkey’s currency was in freefall, sliding more than 10 per cent in early trading, taking the fall so far this year to more than 40 per cent, as investors signalled their deep unease at the country’s economic stewardship and at tensions with the US.
Viktor Szabo, an emerging markets fund manager at Aberdeen Standard Investments, said the sell-off in the lira was becoming “unsustainable” with “clear signs of panic” in the market.
Mr Albayrak’s task was to persuade the markets to change their mind. Recently appointed finance minister by his father-in-law, President Recep Tayyip Erdogan, he had promised to set out a “new economic model” to boost confidence.
But the initial signs were that Mr Albayrak had fallen far short of the result he sought, as the market continued to pummel the lira. Investors warned that the economy required much more drastic action, which could prove painful for Turkish citizens and companies.
The 40-year-old dabbed his brow with a napkin as he addressed ranks of executives hastily summoned to Istanbul’s Dolmabahce Palace, the Ottoman Sultans’ version of the Palace of Versailles.
He sought to couch his remarks in the language prized by international investors. He said that the independence of the Turkish central bank was a matter of principle and that reinforcing financial stability was a high priority target.
Mr Albayrak added that the country aimed at completing the “first phase” of a soft economic landing this year or next, and said the government would focus on three priorities: “a strong fight with inflation,” “fiscal discipline with a much tighter Finance Ministry,” and “reducing the current account deficit.”
The finance minister suggested that the government would try to tamp down growth at about 3 per cent a year, reduce the current account deficit from more than 5.5 per cent of GDP to 4 per cent and reduce the budget deficit to 1.5 per cent of GDP.
But he offered few specific actions in his hour long address. The markets were not reassured. After Mr Albayrak sat down, the lira smashed through its previous all-time low, set earlier in the day, and touched TL6.8 to the dollar, its fall accelerated by a hostile tweet from President Donald Trump.
“There are some positive words in this plan but we really need to see action now from Turkey,” said Mr Szabo at Aberdeen Standard Investments.
“The short-term solution is simple: raise interest rates aggressively and rein in credit to cool down the economy and bring inflation into check . . . They don’t really have any other option — but the situation has got so out of hand that they are going to have to go much further than they would have had to even just three weeks ago.”
Many analysts say that Ankara has few alternatives to defend the currency and to slow inflation now running above 15 per cent. The central bank has limited resources with which to intervene in the market. Moody’s, the rating agency, said in a note in June that net foreign-exchange reserves dropped to about $26bn at the end of April, down from $38.5bn at the end January 2017.
But a number of investors say that Turkey needs to go further than just an interest rate rise.
“The worst case we imagined three months ago is upon us, and now we have think about the next worst case,” said Grant Webster, fund manager at Investec Asset Management.
He compared Ankara’s travails with the problems of another emerging market that recently had to seek help from the IMF. “Look at what Argentina had to do. They are quite shocked when you compare Turkey to Argentina but now the reality is upon them.”
Mr Webster said that Turkey was already looking at inflation “well above 20 per cent”, even if the lira stabilised and would therefore require interest rates of 25-30 per cent, compared with today’s benchmark of 17.75 per cent.
“For Europe this is very serious,” he added. “This is a country of 80m with very porous borders to places like Syria, it’s got a huge refugee base and it’s on Europe’s doorstep.”
The consequences for the Turkish economy of the lira’s slide are considerable — but so too will be the effects of any action to counter its fall.
“This is a dangerous period,” said Selman Esmerer, who runs an Istanbul factory whose 130 employees make cardboard packaging for food. “Bankruptcies may be inevitable.”
Mr Esmerer learned from previous crises in Turkey to avoid borrowing in dollars and euros. Higher interest rates are difficult to contend with but, his debts are much easier to service than the foreign currency loans much of the Turkish economy relies on.
But his is a relatively rare case. According to central bank data, Turkey’s non-financial companies’ foreign currency liabilities now outstrip their foreign exchange assets by more than $200bn. In the next 12 months alone, private non-financial institutions will have to repay or roll over $66bn in foreign currency debt. For Turkey’s banks, the figure is $76bn.
“Some businesses are moving to cash,” Mr Esmerer said “If trade is done in cash, then volumes will fall by 50 per cent.”
Turkish citizens — many of whom have bank accounts in foreign currencies — may also be about to to feel the pain.
Mr Webster at Investec Asset Management suggested that the government had “half an eye on large dollar deposits of households”. He added: “There is at least $100bn, and they could look to those to put in place some soft capital controls and prevent people from buying more dollars.”
Mr Erdogan has already put Turkish citizens on notice that their foreign exchange savings are on his mind, calling on them to sell their dollars and euros as the country battles against what he terms an “economic war”.
“We may have a few days of trouble, but they will be overcome — there is nothing they haven’t tried to bring our country to our knees,” the Turkish president told a rally on Friday. “Our responsibility is to you, not to George or Hans but to Ahmet, Mehmet and Ayse.”