Understanding Turkey’s Bold Plan To Stabilize the Lira

Joe Weisenthal (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

Tracy Alloway (0:17)

And I'm Tracy Alloway.

Joe Weisenthal (0:18)

It's pretty incredible how every, for the last several years, maybe five, six, seven years, I feel like there is this rhythm where maybe every nine months or every year, the world really turns its focus to what's going on with Turkey, what's going on with Turkish monetary policy, and what's going on with the lira.

Tracy Alloway (0:40)

Yeah, I know what you mean. It does seem to pop up at least once a year, and suddenly everyone's very focused on it, and then within a month or two, people seem to have forgotten it, or at least it's moved out of the limelight.

But I have to say, we're recording this on, ooh, Christmas Eve, December 24th, and this week in particular has been one of those weeks where everyone wakes up and decides that they all have opinions on Turkey and what's going on there. And to be fair, we have seen this enormous amount of volatility in the lira. So I think the lira was up something like 25% on a single day this week after Erdogan announced a new mechanism to try to stop its halt. And before that, it was down, I think it had lost like half its value over the past three months. So just crazy moves in the currency.

Joe Weisenthal (1:35)

Yeah, right. There are a lot of EMs which see significant currency volatility.

We see it in Brazil from time to time. We see it in South Africa and so forth. But there seems to be nothing quite like the volatility that we see in the lira.

And it's incredibly volatile. And as you mentioned, and you said the lira rarely 20% in a day. I think it was up like 35% from the lows of that day. Cause I think in the morning it was down 10%. But as you mentioned, President Erdogan having instituted a new mechanism to attempt to stem the decline, and we'll get into how that works, I think it was up 35%. Like truly any sort of like macro tourist that was interested in currencies, monetary policy, etc. had to be sort of like jaw dropping at that move that day.

Tracy Alloway (2:25)

Right. And the other thing going on with Turkey, of course, is this, I guess, rejection of economic orthodoxy.

So when it comes to emerging markets, I think there's often a perception that, you know, EMs are different to developed economies for a variety of reasons, but there's always concern about fiscal discipline and whether or not they're going to be conservative, whether or not they have the institutional strength to keep the economy in check and keep it stable. And then when it comes to Turkey, we've seen just, I guess, an extreme version of these concerns where Erdoğan is rejecting economic orthodoxy. He keeps lowering interest rates and that's leading to inflation and that's causing the currency to fall and no one really knows how to interpret it, I guess.

Joe Weisenthal (3:17)

Yeah, I think that's exactly right. And you see it from time to time that various EMs will say, have a central banker who is very steeped in sort of neoclassical economics and whether the sort of measures are successful or not, there's often this sort of portrayal to foreign investors of like fiscal discipline and central bank independence and macroeconomic orthodoxy. And I think people look at Turkey and they see an example of a country and a system that's very much not playing by those sort of like the standard playbook. And then they see the volatility and they say, oh, well, this is what happens when you don't follow the rules laid out by the University of Chicago Economics Department.

Tracy Alloway (4:04)

Yes, that's one way of putting it.

Joe Weisenthal (4:06)

Yeah. Anyway, but I still, you know, again, I sort of measured like, you know, so many like tourists look at Turkey and I don't think we have like a truly deep understanding of what is going on in the economy, the approach to monetary policy, what is going on with the lira and so forth. So I'm very excited about our guest today who is going to help us understand everything about how the Turkish economy and monetary system works. We're going to be speaking with Lütfullah Bingöl. He's an economist at a bank in Istanbul, Albaraka Turk.

Lütfullah, thank you so much for joining us.

Lütfullah Bingöl (4:38)

Thanks for having me, Joe.

Joe Weisenthal (4:41)

So why don't we start? I mean, would you say it's, I mean, it's a fair characterization, this idea that Turkey in a very sort of overt sense does not sort of make the same, I guess, yeah, want to play by the same playbook as many emerging markets typically attempt to?