Monday 16 May 2022

Turkey’s plunging lira: don’t expect an end to this saga soon

I published this article in March 2021 when the Turkish currency was facing yet another plunge owing to unorthodox economic policies of Erdogan. While I predicted  significant interest rate cuts and runaway inflation soon after this article (see below the chart), it took five months for the rate-cuts to happen and the rest is history...     

source: Turkish consumer price index as of April 2022

Turkish lira to USD - almost double of what it was last year

25 March 2021 Emre Tarim, Lancaster University

The Turkish lira has once again made global headlines, with a steep drop of 15% on March 22, running from below 7.20 to the US dollar to over 8.28, before settling just below 8.00. This came on the back of a midnight decree on March 19 by the Turkish president, Recep Tayyip Erdoğan, to sack Naci Ağbal, the governor of the central bank.

This is the third time Erdoğan has sacked a governor since being elected the first executive president of Turkey in June 2018. Such a turnover of governors in the age of independent central banks is unusual.

It helps to understand that the president and his brand of “folk economics” argues that high interest rates cause high inflation. This is contrary to economic orthodoxy, which would say that raising interest rates is the remedy for inflation. Ağbal was dismissed a day after hiking interest rates.

The three governors

The first governor to serve under Erdoğan was Murat Çetinkaya. He was sacked in July 2019 for allegedly refusing to cut interest rates, citing the bank’s independence.

He was replaced by Murat Uysal, who instigated sharp interest rate cuts after coming into office. This brought rates into negative territory once inflation is factored in.

This may have chimed with Erdoğan’s views on economics, but the markets and the economy had other ideas: there followed a cheap credit boom, which stoked inflation and saw the lira weaken to the point that it hit historical lows against the US dollar and euro. In November 2020, Uysal was summarily dismissed.

When Naci Ağbal replaced Uysal, investors were cautiously optimistic. Ağbal had been the minister of finance and economy in the final cabinet of Turkey’s parliamentary system, before it was replaced by the executive presidency in 2018.

On assuming the central bank governorship, he reversed the low interest rate policies of his predecessor and started raising rates instead. He repeatedly stressed the importance of price stability and low inflation as the central bank’s two legal mandates since 2001.

Not only was Ağbal saying the right things, he seemed to have the president’s endorsement. Only two days after Ağbal had assumed the governorship, Erdoğan’s son-in-law, Berat Albayrak, who had overseen Erdoğanomics for almost three years as minister of finance and economy, infamously resigned via his Instagram account.

Former party insiders claimed that Ağbal had been critical of Albayrak’s policies, including restrictions on having a free-floating currency and the alleged sale of US$128 billion in central bank reserves to prop up the free-falling lira. These had led to significant capital outflows and growing questions about whether Turkey was a viable emerging market for foreign investment.

Meanwhile, Erdoğan has been stressing the importance of price stability and market-friendly economic governance in various speeches during Ağbal’s tenure. It all seemed to suggest that Erdoğan had U-turned on his unusual economic beliefs. Perhaps three years of low interest rates, high inflation and heady boom and bust cycles might finally have been coming to an end.

Investors responded by ploughing an estimated US$15 billion (£11 billion) into the Turkish capital markets since Ağbal’s appointment. Over the period, the lira appreciated more against the US dollar than any other emerging markets currency. But following a final interest rate hike to 19% to tame inflation whose official rate of nearly 16% is allegedly underreported, Ağbal has turned out to be the shortest serving governor under Erdoğan so far.

Where next

This is not an easy time to be taking over the management of Turkey’s economy. As well as the high inflation and high interest rates, Turkish savers seem to have lost faith in the lira as their foreign currency holdings reached record levels in 2020. None of this bodes well for a country with a sizeable private and public debt of some US$440 billion owed to foreign creditors and mostly denominated in US dollars.

The new central bank governor is Şahap Kavcıoğlu. He is a former banker and a current professor of banking and finance. He is a columnist in a pro-government newspaper, which on its front page accused Naci Ağbal of a conspiracy against the Turkish economy a day before he was sacked.

Kavcıoğlu has written columns supporting Erdoğanomics, including its low interest rate low inflation theory. One can therefore easily understand why he has been appointed. We will probably see successive interest rate cuts starting from April when the central bank’s monetary policy committee gathers for its regular monthly meeting.

This will probably be followed by another economic boom fuelled by cheap credit alongside runaway inflation on the way to the second presidential election in 2023. Given the unsoundness of Erdoğanomics for an open economy like Turkey, we will probably also see new record lows for the lira along the way.The Conversation

Emre Tarim, Lecturer in Behavioural Sciences, Lancaster University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Friday 17 August 2018

Turkey's lira crisis: 'economic war' sees Erdoğan look east for new allies

(This is a commentary I have recently published in the Conversation, an academic opinion platform run by a consortium of universities in various countries)

Emre Tarim, Lancaster University

Global markets are on edge once again, this time thanks to the Turkish lira. It crashed more than 15% against the US dollar, euro and pound sterling on August 10 and continued to fall when markets reopened after the weekend on August 13.

The latest trigger was Donald Trump’s announcement that he would double import tariffs on Turkish steel and aluminium. But the lira has been falling consistently over the past year as markets fear for the president’s increasing control over the economy.

With their mammoth depth and reach, global currency markets reflect big shifts to new economic and political realities. Sterling dropped by more than 10% when it became clear that the UK had voted to leave the EU in June 2016. Currency markets can also hasten these shifts, for example in 1992 when the UK crashed out of Europe’s fixed currency regime, the Exchange Rate Mechanism, after sustained runs on sterling in currency markets.

The lira crisis therefore – at the very least – reflects the political and economic turmoil taking place in Turkey. It could also play a key role in shifting the country from relying on the West to aid its economic development and turning east to Russia and China for growth and investment.

Crisis and contagion

The underlying economic cause for the crisis is simply a lack of confidence in Turkey’s economy. Inflation is spiralling (currently more than 15%), Turkish companies are saddled with foreign debt and the country has one of the world’s largest current account deficits in proportion to its economic output, heightening fears of a debt crisis.

As an open economy since the late 1980s, Turkey has attracted significant international capital flows. These flows, some of which are highly mobile and short term, also expose Turkey to sudden stops and reversals when international investors fear the worst. The recent history of globalisation in developing countries is full of such crises, including the 2000-01 Turkish banking and currency crisis. It was the aftermath of that crisis that brought Recep Tayyip Erdoğan and his AK party to power.

As of August 2018, Turkey has an external debt of US$406 billion, US$99 billion of which is short term. What worries foreign banks and markets is the exposure of some European banks, as direct investors in the Turkish banking sector. According to estimates, this amounts to more than US$138 billion.


              Turkish lira to the US dollar.

Should private Turkish debtors, who owe around 75% of Turkey’s external debt, fail to service their share as a result of the nosediving lira and creditors’ unwillingness to lend any more hard currency, the European financial system might have to absorb significant losses. This is similar to what happened during the Greek debt crisis.

Political decisions

None of these debt figures have emerged overnight. What transforms them into a currency and debt crisis is ultimately political. The presidential election in June gave Erdoğan unprecedented control over all branches of the state and he has made his intention to interfere with the economy clear.

Since the new presidential system came into effect, international investors have been trying to understand where Erdoğan would steer the Turkish economy. The signals so far, including Erdoğan’s appointment of his son-in-law as the minister in charge of the economy, suggest a new period of “Erdoğanomics”. This includes a mix of high government spending, politically repressed interest rates and runaway inflation. Such a heady mix has caused a surge in Turkey’s risk premium.

The worsening political relationship between Turkey and the US does not help. Over his 16-year rule, Erdoğan has rallied his supporters on a number of occasions against real and purported threats to his rule. He is once again  defiant against Western economic and political actors, whom he accuses of striving to destabilise Turkey under his rule, this time via the runs on the Turkish lira. 

The Conversation

This defiance seems to have consolidated Erdoğan’s domestic power, but given the country’s considerable economic reliance on Western banks and markets, the country is now more vulnerable than ever to a currency and debt crisis of its own making. Freeing Turkey from this difficult corner will be a feat. If and when Erdoğan achieves it, Turkey will probably have shifted a considerable part of its economic and political allegiances, from the West to the East, with both Russia and China potential future allies in what Erdoğan has called an “economic war”.

Emre Tarim, Lecturer in Behavioural Sciences, Lancaster University

This article was originally published on The Conversation. Read the original article.

Friday 5 January 2018

Searching for the futures of consumption

On the 6th of May, 2017, Lancaster University in the northwest of England, where I have been working as a lecturer in the Department of Marketing since September 2017, held a Community Day for the city of Lancaster community. The premise behind this event was to showcase to the public in an interactive way what the University is doing in research, teaching and community engagement. There were several dozen activities, such as making of custard rockets, 3D printing, theatre plays, and robo-car racing.

Some high chemistry during Lancaster Community Day (By Lancaster University)

I, Ronika Chakrabarti, Stefanos Mouzas, Anuja Pradhan, and Mohammed Chaded from the Department of Marketing designed and led our concept of Marketing Pavilion to showcase to the public what Marketing is and what the Department has been doing in research, teaching and public engagement. To be honest, this whole effort helped me understand Marketing better as an academic discipline and see Marketing's close connections with social science and human science disciplines such as Sociology and Psychology.
Marketing Pavilion Flyer (By Emre Tarim)

One of the activities at the Pavilion was what I called a "search" - namely, a group of people coming together in a total horizontal way (no hierarchies or status distinctions- e.g., researcher, student, member of public) and discussing a topic and searching its future with a view to taking action for that future.

I learned this method when I was working as a consultant at Arama Search Company, Istanbul, Turkey in 2012 and 2013. This company is founded by Oguz Baburoglu who is an internationally renowned action researcher. Having learned some aspects of the craft under Oguz's wings, I thought it would be interesting to apply this method during the Community Day.

At the end, we had an hour-long search for the futures of consumption, and we concluded with the necessity of universal design principles for best practices in production and consumption. Below is a step by step account of how we searched for the futures of consumption and came up with this conclusion.

Our search session aimed at exploring what we understand from consumption, and how we see its future and how we would like to see its futures. Our aim was therefore two-fold- namely, elaborating the consumption related trends that we see and experience, and articulating the futures of consumption that we as a community would like to see

Our search method consisted of simply asking questions and writing down answers on whiteboards and flip charts with a view to collectively identifying commonalities in our answers, and collectively moving on to the next question and theme on the basis of those commonalities.

Emre and Stefanos recording the ideas on whiteboards (by Anuja Pradhan)
We started with the question – What is consumption? This surely created a good number of answers in the form of key words that came to our minds. In the process, we also realized that we were dwelling more on the negative aspects of consumption, and some of us reminded the positives of consumption, such as the scientific advances, that made our lives safer, healthier and longer. As we were reaching saturation in our definitions - key words, we turned our attention to changing forms of ownership in consumption in digital age, and the often overlooked materiality of consumption (e.g., production, transport etc.), including the waste it generates

Discussing the definitions of consumption (by Anuja Pradhan) 

Consumption: Definitions – Key words 
Need for something, satisfying needs
Supply and demand
Fashion (in trends, modes of consumption)
Tiredness (caused by information/product overload, never ending “needs”)
Scientific advances and positive outcomes generated with consumption
Senses of consumption (simplicity vs sophistication)
Ownership (consumption access and sharing)
Finite resources - End of consumption?
Materiality of consumption – Waste

Some of the definitions recorded on whiteboards and flipcharts (by Emre Tarim) 

Commonalities : Towards Themes
Themes emerging (by Anuja Pradhan) 

Having listed all the key words, we then searched for commonalities among these definitions and came up with the following four themes:
  • Materiality
  • Information
  • Consumer needs vs. Consumer wants
  • Consumption, Wealth and Prosperity

Futures of Consumption?

Continuing with the positive outcomes of consumption and how to sustain them in the future, we decided to focus on the last theme- namely, Consumption, Wealth and Prosperity. Our question was how consumption, despite all the negatives (e.g., waste, addiction, inequality, etc.) it generates can generate wealth and prosperity for all , not the few (no political slogan intended here!). After this decision on our collective focus, we searched for ways in which consumption can achieve this.

Ideas flowing on futures of consumption (by Anuja Pradhan) 

Here are the points and questions raised:
  • Inclusion, Inclusive consumption 
  • Is consumption becoming more inclusive or exclusive ? (e.g., How can we make sense of foodbanks, something as an inclusion or exclusion move? Is it something positive – “allowing people to continue consuming”, or negative- “justifying and/or concealing policies and inequalities that condemn people to food banks?”) 
  • Which unit and level of consumption should we focus on when we think of inclusion and exclusion? (E.g., individual, family, citywide, nationwide) 
  • What is the purpose of the consumption item? (Our consumption needs, are they active or latent? ) 

As we continued with the inclusion and inclusive consumption search, we came up with the following question: How can we make products and consumption more inclusive?

We also realized that this also touched on the materiality of consumption- namely, design, production, and so on. We therefore focussed on what kind of products (designs) we need to bring about the futures that we would like to see consumption generate. 

Products (Designs)
Product design principles ? (By Anuja Pradhan) 

  • Multifaceted in purpose (e.g., Meeting individual consumption and societal needs at the same time)
  • Built to last, given the finite environmental resources? What about wealth and prosperity from continuous production? A need for balance between sustainable production and sustained prosperity 
We then decided to write down some design principles for future products:
  • Add-ons (Making products multifaceted in purpose) 
  • Sustainable (Durability, ecology, transparency [e.g., plastic microbeads in personal hygiene products and campaigns to ban them ], intergenerational responsibility) 

The Future of Consumer Activism

Having discussed these, we realized that we as consumers have a great role to play in shaping product designs and  in morphing products, producers and markets towards the inclusive futures that we desire. This brought us to the matter of consumer activism. Here are some of the themes that arose from our discussion on the future of consumer activism
  • What does a durable/sustainable product look like? (E.g., a cleaning mop lasting 10 years?) 
  • How can we communicate our product design desires to producers? 
    • Digital democracy [enabling us to work with producers?] 

Futures of consumption (By Anuja Pradhan) 
We then discussed aspects that are closer to us consumers in consumption and consumer activism such as vulnerabilities, emotions, traditions, and how we can come up with best practices among ourselves and producers.
  • Minimizing vulnerability (as consumers)? 
  • Best practices in ? (Cost and affordability and price, waste and sustainability, institutions [existing practices vs how to institutionalize rare but best practices]) 
  • Guilt [associated with consumption, production, waste] 
  • Consumer protection- What should be its scope? 
  • Mobilizing emotions [associated with consumption/issues] 
  • Family traditions [in consumption] vs Change (What is the unit of change in behaviour [individual vs. family?]) 

Future Actions and Challenges
Points about future actions 
and challenges (By Anuja Pradhan)
We then considered necessary steps in bringing about changes for the futures we desired. In doing so, we also acknowledged the contradictory nature of issues in consumer activism, e.g., Lack of information vs. Information overload; Yes, mobilization but how?; Have information but what is next?; Institutions vs. How to institutionalize the new design needs for a different future. Here are the points we recorded on flipcharts
  • Seeking information to inform people (but information overload too, is this necessarily a bad thing?) 
  • Mobilization [of consumers and other stakeholders but how?] 
  • Crowdsourcing [information and other resources necessary for mobilization in a digital age?] 
  • Institutions (redesigning e.g., family, corporations, market, the state] But can all expectations be included? 
Universal Design Principles
Result of an hour-long search? (By Emre Tarim) 
Having discussed for an hour the meanings and futures of consumption, we wrapped up the search brainstorm with two practical outcomes or challenges that we consumers can pursue for a future of consumption that generates inclusive and sustainable wealth and prosperity:
  1. Universal (consumption and product) design principles for best practices [towards inclusive and sustainable wealth and prosperity]
  2. [Answering the following questions] 
    1. How will [these principles] look like ?
    2. Who will do [formulate] [these principles]?

We felt that these questions should be answered by searches like the one we had during the Community Day at the Marketing Pavilion. The issue of consumption is too important to be left only to producers.

Many thanks to all participants at the Marketing Pavilion

Sunday 5 February 2017

What lies ahead for Istanbul as an international financial centre?

Levent, one of Istanbul's financial districts. By VikiPicture  [CC BY-SA 4.0 (], via Wikimedia Commons

I have recently published a short commentary on the phenomenon of international financial centres- public and private initiatives to promote  major global cities as hubs of financial trading and services. Having explained the background to the concept and how cities are ranked by international business consultants, I have then discussed Istanbul's very own initiative led by the AKP government since 2007.

The initiative's list of objectives is long and consists of  areas ranging from education through infrastructure to regulation. These objectives are comprehensive and commendable as they will expand and deepen Istanbul's sophisticated financial services to Turkey and its hinterland.  Yet, as I have  noted in my commentary,  one of the two most prolific activities  for the Istanbul finance centre initiative has so far been construction work in Atasehir - a densely built and congested area in Istanbul's Asian side. This several billion dollar building work aims  to relocate various state financial institutions from Ankara to Istanbul, and complement these office buildings  with a shopping mall, residential buildings and recreational areas. The ongoing building work  does not make much sense given the advances in telecommunication technologies and the fact that these state institutions do not seem to suffer from poor infrastructure or building stock. It can however be understood as part of the AKP policy of promoting economic growth via construction and infrastructure  activity, especially at a time when the Turkish economy has been stagnant compared to its growth potential as an emerging market.

Atasehir district, where the building work for Istanbul finance initiative takes place. By © Nevit Dilmen, CC BY-SA 3.0, 

Second most prolific activity seems to be promoting Islamic finance. Islamic financial services have made significant advances in recent decades and several cities such as Kuala Lumpur, London and Doha compete for a larger share in this fast growing sector. Islamic finance is not just for pious Muslims. It can be attractive to ethical investors and any other investor when it offers competitive financing options.

Istanbul's competitiveness in Islamic finance has a lot to improve as currently there are only few Islamic banks in Turkey and there is no regulatory authority that can check the Sharia compliance of any existing or future financial product or service. Reliance on an external authority such as one  in London or Egypt might be complicated and reduce Istanbul's competitiveness.  All in all, the focus on Islamic finance has the potential encourage many pious Turkish savers to shift to their savings - which they generally keep in instruments such as gold, foreign currency, and real estate-   to the Turkish financial system. It can also be attractive to regional and international investors. Nevertheless, the initiatives for Islamic finance in Turkey should not be designed as a substitute for the existing financial services and markets, which are premised on secular commercial and judicial principles. After all it is these services that have put Istanbul on the global map of financial centres. Narrowing their reach by promoting Islamic finance at their expense will not help Istanbul nor the Turkish economy.

Here is the link to the article in The Conversation - a great platform for academics to disseminate their research and opinions with journalistic flair . Articles are free to republish with attribution under CC licenses. Many thanks to  Annabel Bligh for her excellent editorial support 

Thursday 13 October 2016

Studying financial markets: Methodologies, disciplinary boundaries or What it takes for a social scientist to get the Nobel?

As part of PhD programme at Edinburgh University Sociology, we the PhD students were encouraged to write working papers on our PhD topics. I wrote a piece on the methodological issues and boundaries in research on financial markets. This was then published in Edinburgh Working Papers. The paper was a very limited survey of the respective literatures of mainstream finance, behavioural finance, international political economy, economic sociology, and social studies of finance (SSF). The latter is simply the application of social science disciplines [not financial economics or behavioural finance!] to the study of financial markets and has its origins in the beginning of this century. Despite its narrow scope, I think the paper gave a good flavor to a general audience of how each discipline theorized and approached behaviours and outcomes in financial markets and what was distinctive about SSF as an umbrella approach- namely its focus on materiality (e.g., financial models, market structure)  in individual and collective financial behaviour. In writing the paper, it was also interesting to see how different disciplines, despite lack of any meaningful mutual awareness, shared similar starting assumptions such as rationality and lack of it!

Having looked back, I am not surprised to see that I as a student of sociology devoted a good part of the paper to economic sociology and SSF with a prophecy that SSF would come to occupy a bigger role in our understanding of financial behaviour. Almost a decade later,  I think that prophecy has materialized so to speak with numerous articles, manuscripts and edited books that are inspired by essential theories and concepts from the SSF's pioneering works (e.g., Callon, MacKenzie and Millo). This is not surprising as SSF's conceptual and theoretical corpus is not unfamiliar and undecipherable to researchers from different subject fields such as anthropology, sociology, and organisation studies. Compare that to mainstream and behavioural finance, which in their empirical manifestations are in a constant debate as to whether markets are efficient or not, using large price data and elegant mathematical modelling to detect (in)efficiencies within. The accessibility of SSF and its attention to the material world that surrounds our behaviour also motivate social scientists to explore how theoretical and material artefacts come to underpin and transform our behaviour not just in financial but also other business domains such as production and marketing.

The lack of an overarching theory such as efficient markets/random walks and prospect theory/ heuristics and biases can be seen as a weakness in economic sociology's and SSF's approaches to financial markets. Although performativity- the theory that economics as a science and its theoretical corpus can format real life markets with a good deal of institutional work-  has engendered a great deal of studies in economic and financial domains (see for example the latest book on performativity, and an earlier special issue on the concept), it is not the only theory that informs SSF's ongoing interest in financial domain. This is a perhaps a strength and a weakness for the future of SSF. On the one hand, being interdisciplinary in its theoretical and conceptual toolkit allows SSF to demonstrate how materiality of markets  is enmeshed with politics, culture and networks. In this vein, one can observe the proliferation of SSF originated  theories, concepts and puzzles within international political economy, anthropology, and accounting research and vice versa.  All these not only encourage interdisciplinarity among social science but also enrich our understanding of financial behaviour. On the other hand, the lack of an overarching falsifiable  theory that attempts to explain individuals and markets behaviour within SSF and economic sociology or any other social science field still underpins in my view  mainstream and behavioural finance's lack of interest in SSF and social science research. Overall, there is hardly any reference in mainstream and behavioural accounts on financial behavior to any pioneering and novel work from SSF and the social science disciplines it brings together. On the other hand, SSF researchers engage with mainstream and behavioural finance. Yet, this engagement mostly takes the form of theoretical/conceptual critique with few insightful  empirical  challenges.

Having thought all these, two questions come to my mind.

What would the mainstream and behavioural finance literature look like  if SSF researchers (antropologists, sociologists, organisational researchers) were retrained as mainstream or behavioural researchers on financial markets?

What would it take for a SSF researcher to get the Nobel prize in economics ?

Saturday 23 May 2015

A new “foreigner” imagery in the Turkish financial markets?*

The recent years of the AKP rule have been marked by the increasingly polarizing voice of Recep Tayyip Erdogan, the current and first directly elected president of Turkey. In the face of opposition and criticism, Mr Erdogan tends to use rhetorical tropes that transform his critics into national and/or international conspirators against him and AKP. A much more severe attack of this type happened in 2013 during the Gezi protests, which labelled all the protests as part of a “coup” against his government, orchestrated by national and international conspirators. As widely publicized, the Gezi protests started after a restitution project was initiated in Gezi Park- one of the few remaining green public spaces in Istanbul. Early protests by green activists quickly turned into nation-wide protests against the AKP rule, which were met with brutality by the state security apparatus. Unsurprisingly, there are a few ongoing court cases against the protestors, and various prison sentences have been given on the grounds of violating the code on protests and marches. A few members of a famous football fan group –namely, Carsi of Besiktas Gymnasium Club are still being tried for much more serious charges such as conspiring to overthrow the government.

One interesting aspect of the AKP’s reaction to the Gezi protests was Mr Erdogan’s efforts to bring international financial actors into his discourse on the conspirators against AKP. As the early days of Gezi protests coincided with what is now called the Tapering Tantrum- namely, the initial flight of capital from emerging countries when the FED announced its intention to finalize its several trillion USD worth quantitative easing programme, the Turkish markets also suffered from this knee-jerk reaction of international investors. The significant losses in the Turkish equity and bond markets were also compounded by the protests and Mr Erdogan’s uncompromising reaction. Mr Erdogan not only dismissed the protests as the work of “riff raff” but also pointed squarely to a coalition of international conspirators and local accomplices, including what Mr Erdogan calls the “interest lobby”. The interest lobby basically refers to international fixed-income investors in Turkey who aim to earn higher returns on their exposure to the Turkish government’s debt. In Mr Erdogan’s view, this lobby is prone to destabilize Turkey by manipulating the Turkish markets and using their economic power for political ends. Mr Erdogan’s discursive attack on international investors actually paved way to a very substantial investigation into international investors by the Turkish market regulators soon after the protests ended. As of 2015, there has been no official declaration as to whether such a lobby exists and what measures would be taken to deal with them. Though unofficial, the Turkish market regulators seem to have basically given up the investigation at the end of 2013 after finding no meaningful evidence of market manipulation by international investors during the Gezi protests. Despite the outcome, these investigations gave Turkish brokers and international investors a firm message that they were being watched for what they advise and do in the Turkish markets.

Looking at the contemporary market cultures in Turkey, one can expect that Mr Erdogan’s rhetoric on the interest lobby would not struggle to find resonance especially among the Turkish retail investors. Since the deregulation of markets in the late 1980s, the gradually increasing presence of foreign investors in the Turkish markets has engendered culturally intriguing imageries and behaviours on the part of Turkish investors. These have included trading opportunism against the unsuspecting foreign investors in the form of fronting orders – buying before foreigners buy and then selling to them at profit. Another one is the “moustached foreigners”, which basically referred to Turkish investors setting up off-shore accounts to benefit from the tax exemptions given to the foreign investors in the 1990s. These off-shore funds were generally associated with notable Turkish investors who day-traded in the markets, influenced market outcomes, and amassed significant amount of financial assets, sometimes at the expense of Turkish and foreign investors.

After the 2001 twin crisis in banking and economy, many of these notable investors lost their economic power in the Turkish markets. Some investors and finance professionals close to these investors lamented the lack of government support to this type of investors when they faced financial difficulties. For them, this demonstrated the successive Turkish governments’ unabated admiration for anything that was “Western”. One could see the point they tried to make as in the structural economic reform era that followed the 2001 crisis there had been a great flurry of international investor interest in the Turkish assets ranging from privatized state companies to Turkish bonds. In 2007, the share of the foreign investors in the Turkish equities rose over 70%, which was more than what it was in the mid-1990s. Moreover the automation and digitization of the Turkish markets also meant that access to market information became much easier than ever, including what the foreign investors were doing in the Turkish markets via their Turkish brokers. This again generated a few theories about the foreigners and their manipulation of the Turkish markets for their own economic gain.

The peak point of national publicity for these theories happened when the Turkish Constitutional Court was to decide on a ban case against AKP in the summer of 2008. While many expected an AKP ban on the back of an ever powerful secular establishment that has been deeply suspicious of democratically elected governments with Islamist tendencies, this did not happen after a very close vote of 6 to 5 in favour of lighter penalties to AKP. Many Turkish investors cried out for investigation into a possible passing of insider information to the foreigners before the court decision. These calls did not lead to a separate and thorough investigation by the regulators. The regulators also sternly dismissed these insider information claims on the grounds that foreign investors invariably made financial decisions based on sound economic analysis, which demonstrated the Turkish economy’s strong growth prospects. On Mr Erdogan and AKP’s front, markets’ gyrations including international investors’ exposure to the Turkish markets had generally been a rhetorical trope to demonstrate how great AKP’s economic management was – when markets were rallying, and how the secular establishment was destabilizing the country and its economy – when markets were jittery about political uncertainty.

So what has changed since the summer of 2008 that would explain not only Mr Erdogan’s new rhetoric about international investors but also the regulators’ changing stance against them? To begin with, the end of 2008 was marked by further and fresh criminal investigations into the various parts of the secular establishment, including high ranking members of the Turkish army. By the end of 2013, there were a few lengthy sentences handed over to the officers, journalists, academics and public figures that were charged with conspiracy to overthrow the government. In these years, the legislative and judicial changes on the back of successive election and constitutional referendum victories for AKP also consolidated Mr Erdogan’s control over different branches of the state, which he has frequently accused of creating a tutelage regime over the democratically elected Turkish governments.

It is in this context of increasingly unrivalled and unchecked legislative and executive power of Mr Erdogan, one can better understand his discourse about everything and anything, ranging from what is wrong with abortion to why higher interest rates lead to higher inflation- contrary to what the economics science theorizes and generally finds sound evidence for. As Mr Erdogan is now the first elected president of the country- a position that has constitutionally limited powers, he does not make it secret that Turkey should have a presidential system Alaturca, which implies absolute control by Mr Erdogan over all branches of the state. This includes the Turkish Central Bank, which has enjoyed autonomy in its management of the inflation targeting monetary policy since 2001. For several years now, the Central Bank’s interest rate policy has attracted criticism by some AKP ministers and Mr Erdogan for being too high to sustain the Turkish economic growth – an area of achievement that many see as the key to AKP’s successive election victories. These criticisms have in recent months taken a much more sinister form in which the bank governor and his very few supporters in the cabinet were indirectly accused of “treason” by Mr Erdogan. The stalling economic growth rates- down to less than 3 % in 2014, coupled with the persistently high inflation must have been a worry to Mr Erdogan and AKP, who are soon facing another election challenge in June 2015. This election is very important for the Turkish president because if AKP reaches over 330 seats out of 550, they could take the country to a presidential system referendum in no time.

On the financial markets front, in a context of slowing economic growth, high inflation and relatively low interest rates, the Turkish assets have become comparatively less attractive to international investors. One consequence of this has been the slowdown in the capital flows to Turkey, which have been essential to balance Turkey’s persistent current account deficit. Despite this slow-down, there has been no significant issue for the Turkish government to raise capital and service its outstanding debt, which enjoys one of the lowest debt-to-GDP ratios in Europe. Difficulties in raising capital are mainly expected for private borrowers, including banks which are exposed to the growing issue of consumer debt in Turkey. Interestingly, Turkey has been enjoying a peculiarity in these circumstances – namely, the net omissions and errors in its balance of payments statistics. This item in the national accounts refers to inflows and outflows of capital that cannot be recorded. Recently, Turkey has received billions of dollars of inflows as such, which cannot be traced back to specific transactions such as exports and foreign direct investment. In the meantime, Mr Erdogan does not seem to relent in his discursive attacks on the interest lobby and their local accomplices in his frequent and widely broadcasted speeches to various audiences. On the other hand, these discursive attacks seem not to resonate with Turkish retail investors and their brokers as much as they would do in the pre-2008 period. When asked, many are of the view that the spectre that helps Turkey balance its books regularly finds its way into the Turkish financial markets and keeps them buoyant despite the lacklustre economic performance. Another view about this spectre is that its colour is green**, which refers to beliefs about its origins in the Middle East and among Mr Erdogan’s close allies.

It seems that the Turkish market cultures are changing in terms of the perceptions about the foreign investor figure on the back of Mr Erdogan’s increasing discursive interventions in the Turkish economy and markets. The Western investor imagery of always being up to mischief in the markets and getting away with it thanks to the Turk’s admiration of anything Western seems to be gradually substituted with a spectral Middle Eastern figure that is in the Turkish markets not just for economic gains but also political reasons. This new figure is poised to dominate market chatter in Istanbul’s dealing rooms in the years to come.

*Appeared first in May 2015 on ReflectionsTurkey, a platform of Op-Ed commentaries on Turkish Affairs
** Green - yeşil in Turkish generally refers in colloquial Turkish  to anything/anyone that is pious about Islam, e.g., green capital.

Wednesday 19 February 2014

The invisible hand in Gezi Park protests? *

In his decade long rule of the country, Mr Erdogan has presided over decreasing inflation and increasing economic growth rates. One of the positive effects of these have been the decreasing interest rates by which Turkey is able to borrow in international markets. Concomitantly, Turkey has reversed its debtor relationship with the IMF and is now planning to increase its contribution to the IMF. These improvements have been recognized by upgrades on Turkey's credit rating, the last of which happened shortly before the Gezi Park protests and reinforced Turkey's investment grade status.

Gezi Park near Taksim Square. By Yinyerale [CC BY-SA 3.0 (], via Wikimedia Commons
The Gezi Park protests started small but turned into country-wide protests after the brutal police crackdown on protester campers in Gezi Park. As protests have widened to Ankara and other cities, the PM has called protesters “chapulcu” [riff raff]. However, the protesters have shown resilience against the excessive use of tear gas, water cannons and rubber bullets. Many commentators have seen this resilience as the manifestation of pent-up anger against Mr Erdogan's increasingly dictating and polarizing voice on different matters such as abortion rules, regulation of alcohol consumption, refusal to grant place of worship status to Cemevi- Alewites' place of worship, and rebuilding Topcu Barracks as a mall at the expense of Gezi Park, one of the few remaining greenery in urban Istanbul. 

Taksim Military Barracks — in Istanbul. Demolished in 1939 (Public Domain,

The PM's rhetoric, which for many is combative and condescending, has not helped. As one commentator put it, this is a protest movement among urbanites to restore their dignity in the face of PM's actions and words. 

Protesters at Taksim Square. By Fleshstorm (Own work) [CC BY-SA 3.0 (], via Wikimedia Commons

It is in these circumstances, the PM has led the discursive counter attack on the protesters by calling them mere tools in the hands of “the interest lobby”. In Mr Erdogan's narrow usage of the phrase, the interest lobby simply refers to a group of national and international actors who strive to increase the fee on the loans given to Turkey. This phrase is not a new tool in Mr Erdogan's rhetorical arsenal. Mr Erdogan and his close circles, which include rising columnists and media tycoons, have repeatedly argued that Mr Erdogan's political and economic success has been at the expense of this lobby.

Riot Police clearing the square 15 June 2013 By Mstyslav Chernov (Self-photographed, [CC BY-SA 3.0 (], via Wikimedia Commons

Although finance capital is expected to seek higher returns, risk is the reverse side of the coin. Simply put, the interest rate by which a country borrows in international markets is determined by a plethora of risk factors such as local inflation rate, global economic prospects influencing the circulation of finance capital, and debtor country's growth prospects and political stability signalling its ability to pay back loans. One cannot rule out foul play in international markets as recent LIBOR fixing scandal has demonstrated. Nevertheless, such scandals and the underpinning opportunistic behaviour cannot explain everything in the markets.

So what has happened in the Turkish markets during the Gezi protests? The stock market went down by more than 10 per cent after the PM's stern dismissal of the protesters and their demands. The benchmark interest rate spiked by more than 2 per cent and the default insurance premiums on the Turkish debt went up by more than 60 basis points to 183. In the process, it is claimed that several billion US dollars have exited the Turkish stock and bond market. For the PM and his supporters, these were the signs that the interest lobby decided to destabilize the Turkish economy not just to earn higher interest fees but also to thwart the rise of Mr Erdogan and Turkey to global power status. Nevertheless, in the weeks preceding the protests, the developed and emerging country stock markets have been jittery because the signs that the US and Japanese central banks might reverse their monetary expansion policies have got stronger. The prospect of such a reversal has led to sellings in the stock markets including the Turkish one which have benefited from the monetary expansion policies and negative interest rates. The Gezi Park protests in Turkey and the government's reaction have exacerbated the downward momentum in the Turkish assets. Nevertheless, the stock market has recouped most of its losses and the benchmark interest rates and the default risk premium on Turkey have loosened down as the protesters and the PM have started dialogue on how to resolve the issue peacefully.
In the early days of the protests, the Turkish stock market fell by more than 10 per cent. Picture by Katrina.Tuliao ( [CC BY 2.0 (], via Wikimedia Commons
If there had been an intent on the part of the interest lobby to topple Mr Erdogan by causing social, economic and financial mayhem, it seems like the lobby has decided to stop playing their part in the financial realm without a reason. The PM and his supporters argue that it has been their uncompromising determination to stay in government and fight any international conspiracy that has scared the interest lobby. Yet, so far there has been no investigation from the Turkish financial regulators on any local or international financial actor **. On the other hand, the Turkish economy has been and will be vulnerable to change of sentiments in international markets mainly because of its low savings rate (one of the lowest across emerging markets) and its dependence on foreign capital to reach its target of becoming a high income country in the next 10 years. Such dependency on foreign capital has actually made the Turkish investors more sensitive to global economic events than domestic economic agenda. In this context, increasing the crackdown rhetoric on foreign capital would add   unnecessary strain on Turkey's ability to borrow in international markets and make things worse for Mr Erdogan's rule.

For long Mr Erdogan's rhetoric of being the victim- turned-hero who can advance Turkey beyond a military tutelage has helped his popularity among the masses. Now that Mr Erdogan seems to have harnessed most of the branches of state authority, he turns to shadowy rhetorical figures such as the interest lobby to explain the growing national discontent with his polarizing rule and reinforce his rank and file. 

*This essay was written in the beginning of June 2013 when the Gezi Park protests were raging in Istanbul and the rest of Turkey. The essay appeared in an edited book titled Reflections on Taksim – Gezi Park Protests in Turkey (Bulent Gokay and Ilia Xypolia eds September 2013, pp. 50-1) The book  is available at

** SPK- Capital Markets Board of Turkey actually started an investigation into foreign investors and their local brokers at the end of June 2013, requesting detailed documentation from the latter . According to a recent news report in Hurriyet, a national newspaper, the investigation was still on at the end of 2013 owing to the CMB's data requests from foreign capital market regulators. According to undisclosed CMB sources cited in the news report, the investigation is not expected to produce any conclusive evidence of market manipulation on the part of foreigners and their local brokers.  (In Turkish)