The Turkish lira has plunged to record lows after President Recep Erdogan named Hafize Gaye Erkan as the new and first-ever female leader of the country’s central bank.
Installed as director of The Central Bank of the Republic of Turkey, Erkan was formerly a finance executive in the United States and had served as co-CEO at the now-defunct First Republic Bank and as a managing director at Goldman Sachs.
At midday on June 9, the Turkish currency stood at 23.34 lira to the US dollar. Despite state interventions, the lira is down more than 20 per cent this year. It’s the worst performer among major emerging currencies after Argentina’s peso.
After Erdogan’s victory in the Turkish elections on May 28, extending his leadership of the country into a third decade, he reshuffled his economic team and promised badly needed reforms.
Over the past few years, the government has pushed for monetary stimulus with the goal of achieving price stability by cutting borrowing costs, increasing exports, and turning persistent current account deficits into surpluses.
WOW! #Turkey President Tayyip Erdogan named Hafize Gaye Erkan as new governor of the central bank. Announcement completes a makeover of Erdogan’s econ team following Mehmet Simsek’s appointment as FinMin — appointments that may signal a return to more conventional policies. pic.twitter.com/47pFVJSb9H
— Holger Zschaepitz (@Schuldensuehner) June 8, 2023
The news of Erkan’s appointment, published in a decree in Turkey’s Official Gazette, completes the overhaul of Erdogan’s senior economic team after Mehmet Simsek, who promised a more “rational” approach to national finances, was installed as treasury and finance minister. That was in apparent reference to Şahap Kavcıoğlu who, in the period he served as the central bank governor from 2021, never veered from Erdogan’s stance that lower interest rates can moderate inflation.
Observers say those economic policies have resulted in a cost-of-living crisis and prompted foreign investors to take billions of euros out of Turkish bond and stock markets. Inflation hit almost 90 per cent last year and, although it has fallen since, it is still at about 40 per cent.
Erkan is the country’s fifth central bank chief in four years. She was with First Republic in the US from 2014 to 2021 in roles that included president, board member and chief investment officer, but she resigned in an unexpected move more than a year ago. The First Republic Bank became the largest lender to fail in America since the financial crisis of 2008.
Her appointment by Erdogan “was taken by markets as a sign of possible normalisation in Turkey’s monetary policies after years of ultra-low borrowing costs”, according to Bloomberg.
However, that didn’t stop the lira swiftly hitting a fresh record low in Asia on Friday once the news of Erkan’s appointment broke.
Goldman Sachs, her former employer, predicted last weekend that the lira would plummet over three months, but the free-fall this week has already surpassed its forecast.
Erkan’s capacity to mitigate the acceleration of prices and attract back portfolio investors will be heavily influenced by the extent of autonomy granted to her by Erdogan, who has openly expressed his aversion to high interest rates. He has previously dismissed governors for implementing stringent monetary policies and, as recently as May 19, affirmed that interest rates would be reduced even more.
“Erkan’s appointment hopefully marks an improvement over the policies of her predecessor,” said Nick Stadtmiller, head of product at Medley Global Advisors. “The lingering question is whether Erdogan will allow the central bank to raise rates sufficiently to bring down inflation.”
.#Turkey’s currency depreciation continues this morning as more people come to the view that, due essentially to competing claims on increasingly-scarce foreign exchange reserves, the Turkish authorities are less willing and less able to intervene in #markets to counter Lira… pic.twitter.com/kdMDSBQ8vb
— Mohamed A. El-Erian (@elerianm) June 9, 2023
