Turkish Economy Could Face Insurmountable Hurdles on Allegations of Cooked Books

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Turkey could face insurmountable hurdles to securing much-needed foreign investment if allegations of cooked books are well founded, according to analysts at Commerzbank, which would further encourage depreciation pressures that already pushed the lira to new lows Thursday.

Former head of Turkstat Birol Aydemir, now turned opposition politician, alleged this week that economic numbers produced by Turkey’s statistical office have been manipulated by staff whose appointments allegedly had more to do with their loyalty to the government of President Recep Tayyip Erdogan than their merits as candidates. 

“This is interesting because some years ago, we raised the question in one of our reports (“Are you kidding me?”) as to whether or not major Turkish data series were reliable,” says Tatha Ghose, an analyst at Commerzbank. “For us, if there were to be any truth to such allegations, this would represent an insurmountable obstacle to investing in Turkey.” 

GDP growth, employment and inflation numbers are key performance metrics for all economies and important inputs in investor decision making, but all are also among those described as “dubious” by the political hopeful Aydemir, who defended the integrity of statistics while at Turkstat but has since described them as “tampered with.” 

There’s no fixed rulebook that dictates what makes for a favourable foreign investment climate and individual investors will almost always have their own requirements, although it’s generally thought that reliable statistics and trustworthy public institutions are prerequisites for all. 

Above: GBP/TRY at daily intervals alongside USD/TRY (blue line, left axis) and EUR/TRY (orange line, left axis).

Turkey has long been a low scorer when it comes to the trustworthiness of public institutions, not least of all because of President Erdogan’s frequent remarks on interest rate policy, which have fostered perceptions in the market of a central bank that is politically compromised. 

But if Aydemir’s allegations that Turkish data is “detached from reality,” made in an interview with Bloomberg News on Wednesday, lead to further and widespread doubts about the reliability of the nation’s economic statistics then the Lira’s troubles may only be just beginning. 

The Lira fell to new record lows against the Pound, Dollar and Euro Thursday after depreciation pressures renewed earlier in the week.

Turkish exchange rates had already turned higher on Tuesday but losses stepped up Wednesday in an apparent response to Aydemir’s remarks, taking the Lira to new record lows that were again surpassed on Thursday. 

“It will be an uphill battle to convince the market that these changes are not temporary, and thus, we remain bearish on TRY,” says Daria Parkhomenko, a strategist at RBC Capital Markets, referring to September's efforts by Turkish authorities to appease a bearish market. 

Above: GBP/TRY at monthly intervals alongside USD/TRY (blue line, left axis) and EUR/TRY (orange line, left axis).

Declines have ended the stability enjoyed by the Lira after the Central Bank of the Republic of Turkey (CBRT) took investors by surprise and lifted its interest rate 200 basis points to 10.25% Friday 25 September. The came ahead of relaxed regulatory curbs on commercial banks' foreign exchange activities, which had limited the supply of Lira to global markets. 

“Although the government’s policies may have pushed out foreigners, the locals still need FX as evident by the current account deficit and the external debt repayments. Meanwhile, the CBRT’s FX & gold reserves remain low vs FX liabilities, including the outstanding FX swaps,” says RBC’s Parkhomenko. 

RBC forecasts the main Turkish exchange rate USD/TRY will rise to 8.0 by year-end, implying further heavy losses for the Lira, although Commerzbank sees it overshooting that level to land on 8.20 by the turn of the year. 

Meanwhile, RBC has the EUR/TRY rate rising to 9.60 while Commerzbank looks for  9.92. The Pound-to-Lira rate is tipped by RBC for an increase to 10.24 while Commerzbank is looking for a rally up to 10.82. These are all new record lows for the Turkish currency but will not necessarily be the end of its depreciation. 

“ If the president were to issue a strong statement in support of the central bank’s independence to follow conventional monetary policy, the market’s attitude towards the lira would vastly improve. But this is too much to ask for,” says Commerzbank’s Ghose, in a note following September’s rate hike.