Jakarta, CNBC Indonesia – The Turkish lira has been slumping recently, even reaching its lowest ever recorded against the United States (US) dollar. The movement of the lira next week risks getting worse in response to steps taken by Turkish President Recep Tayyip Erdogan to expel 10 ambassadors from western countries, including the US.
“I ordered the Minister of Foreign Affairs and said what to do: These 10 ambassadors must be declared persona non grata (undesirable). You will finish it soon,” Erdogan said in a speech in the northwestern Turkish city of Eskisehir Reuters, Sunday (24/10).
Besides the US, nine other ambassadors were from Canada, Denmark, France, Germany, the Netherlands, Norway, Sweden, Finland, and New Zealand.
“They will know and understand Turkey. When they don’t know and understand about Turkey, they will leave,” he said to cheers from the audience.
The root of the problem is that all the ambassadors on October 18 gave a joint statement asking Turkey to release Osman Kavala.
Kavala is said to be a philanthropist who has been detained for four years. He is accused of funding large demonstrations in 2013, as well as involvement in the failed coup in 2016. Kavala has denied any involvement.
Erdogan’s move to expel the 10 ambassadors would be the deepest rift with Western countries during his 19 years in power.
This of course worsened the condition of the Turkish lira, which on Friday (22/10/2021), touched the weakest record in history of 9.6581/US$. So far this year, the lira has fallen nearly 29%.
The decline in the lira occurred after the governor of the Central Bank of Turkey (TCMB) Naci Agbal was sacked by Erdogan for no reason in March. The market saw the dismissal as a result of Agbal being aggressive in raising interest rates. Agbal only served four months, during which time interest rates were raised by 875 basis points to 19%.
This is not the first time Erdogan has tampered with strategic positions at TCMB. Since 2019, Erdogan has fired the governor of TCMB three times. When the governor contradicts his views, he will almost certainly lose his post. This makes the independence of the Turkish central bank always questioned by market participants.
Erdogan then appointed Sahap Kavcioglu as governor of TCMB. He has a banker background and is a member of parliament from the Turkish Justice and Development Party (AK Parti) led by Erdogan. Like Erdogan, Kavcioglu has a similar view that high interest rates are ‘the culprit of the devil’.
As a result, since taking office, Kavcioglu has been aggressive in lowering interest rates despite very high inflation. Most recently, on Thursday, TCMB cut interest rates by 200 basis points to 16%, while inflation in Turkey is currently around 19%. As a result, the lira continued to decline.
CNBC INDONESIA RESEARCH TEAM
(pap / pap)
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