Turkey Is Heading for Economic Collapse, Ashmore Says

Selcuk Gokoluk
Turkey Is Heading for Economic Collapse, Ashmore Says

(Bloomberg) -- President Recep Tayyip Erdogan risks pushing Turkey’s economy into an economic collapse similar to those seen in Latin America under populist regimes, according to Ashmore Group Plc.

While more diversified than Venezuela’s oil-dependent economy, Turkey is currently on a very similar path of policy missteps that are likely to lead to ruin, the $85 billion emerging-market asset manager said.

Capital controls, nationalization and other policies designed to prevent the private sector from protecting its property as the macroeconomic environment deteriorates are the next “logical policy steps” that will follow in Turkey, Jan Dehn, the London-based head of research at Ashmore, said by email. His comments, initially in a research report Tuesday, came after Erdogan rattled markets by dismissing central bank Governor Murat Cetinkaya early Saturday.

“The problem is that U-turning back to good policies has very big upfront political costs,” said Dehn, who caught the bottom of the market on the Russian ruble in December 2014 and turned bullish on emerging markets in October 2015, months before a two-year rally began. “The longer he delays the bigger the cost, which is why politicians who go down the heterodox route rarely change tack and they almost always end in crisis.”

Turkish officials have repeatedly denied any plans to impose capital controls and said they would adhere to free-market principles. Erdogan said there is need for a “complete revision” at the country’s central bank, blaming Cetinkaya for a failure to communicate with markets and an inability to inspire confidence.

The lira weakened 0.3% today against the dollar, extending this year’s depreciation to 8%, the second-biggest drop in emerging markets.

Here is Dehn’s characterization of the decline:

Bad economic policies begin to extract a political costInstead of fixing the causes of the underlying economic problem, the government decides to attack the symptoms of the problem, such as inflation, slower growth, weaker currency and slowing investmentThe real problems meanwhile are ignored and get worse. They include bad monetary policies, increasing interventionism, failure to develop local financing markets, overly low savings rates and bad foreign policiesThe government also blames other groups instead of itself, because this works politically, but it only makes investors and businesses even more worried as Erdogan will need more and more scapegoats as the economy worsensAs the economic outlook worsens, investors and businesses begin to take action to defend their wealth and livelihoods. This results in capital flight, declining investment and other hedging strategiesThe government starts to blame the private sector for bad performance, taking action to prevent their defensive actions. Enter capital controls, nationalization, forced conversion of contractsEventually the government has no financing, no growth, no future and plunges into a crisis

(Adds the lira price in sixth paragraph.)

To contact the reporter on this story: Selcuk Gokoluk in London at sgokoluk@bloomberg.net

To contact the editors responsible for this story: Dana El Baltaji at delbaltaji@bloomberg.net, Srinivasan Sivabalan, Justin Carrigan

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