Few Turkish financers expected to find themselves standing up for Murat Cetinkaya, Turkey’s former central bank governor, whose three years in office were often marred by erratic and unorthodox policy making.
But his sacking over the weekend by President Recep Tayyip Erdogan after a clash over the pace of interest rate cuts drew howls of outrage.
“Removing the central bank’s governor in this manner will deal a big blow to its institutional structure, capacity and independence,” Ibrahim Turhan, a former deputy central bank governor, wrote on Twitter.
The manner of Mr Cetinkaya’s departure means that the new governor, his former deputy Murat Uysal, risks being seen as beholden to the president. Faik Oztrak, a former senior Treasury official and a member of Turkey’s main opposition party, warned that the central bank had become “a prisoner of the presidential palace”.
The firing of Mr Cetinkaya has deepened the already profound concerns among investors about Mr Erdogan’s dominance over all areas of government policy, including economic management.
Some now fear that, if the new governor faces pressure to aggressively cut rates, Turkey could be headed for a repeat of the currency crisis last summer that wiped 30 per cent off the value of the Turkish lira in 2018, caused inflation to skyrocket and triggered a recession. Analysts say that this would be a lot more painful a second time round, especially for Turkish corporates that are saddled with foreign currency debt and their lenders.
In Asia trading on Monday, the lira fell as much as 3 per cent to a low of 5.793 per dollar before trimming losses to be 2.2 per cent lower as of the early afternoon in Hong Kong.
“If you are hit by another exchange rate shock when the economy is already in a recession that will severely limit your ability to pay back your debt,” said Selva Demiralp, a professor of economics at Istanbul’s Koc university. “We haven’t even resolved the first crisis yet … Another hit is only going to make things worse.”
When Mr Cetinkaya was appointed as governor three years ago, he was widely seen as a lackey of Berat Albayrak, Mr Erdogan’s powerful son-in-law, who last year became treasury and finance minister.
Under fire from Mr Erdogan — a notorious opponent of high interest rates — he drew criticism from investors for failing to respond quickly enough to steep slides in the lira.
When the currency plunged last August, the bank waited six weeks before raising its benchmark rate to 24 per cent.
Though investors have been alarmed by other unorthodox tactics, most notably the bank’s efforts to disguise an erosion of its foreign currency reserves, they have praised Mr Cetinkaya for keeping the main rate on hold since September. Inflation fell to 15.7 per cent last month, while the large current account deficit has drastically shrunk.
Yet, behind the scenes, tensions were mounting. The central bank governor increasingly clashed with Mr Albayrak, according to several people familiar with the matter. The finance minister acted as an emissary for the president, whom Mr Cetinkaya had not seen one-on-one for almost a year prior to his sacking.
Mr Cetinkaya angered the finance minister by refusing to cut rates at the last meeting of the monetary policy committee in June. They tussled again over the plans for the next meeting, in late July, when Mr Cetinkaya was willing to lower rates — but not as much as Mr Albayrak wanted. Mr Erdogan last month warned that high rates were “hurting” Turkey and promised that a “definitive solution” would be found soon.
Less than three weeks later, Mr Cetinkaya — who refused to resign — had been fired. Legal experts said that the manner of the sacking, by presidential decree, was illegal.
A finance ministry spokesman did not respond to a request for comment. But Mr Erdogan all but confirmed the dispute over rates at a meeting of ruling party MPs on Saturday, according to Turkey’s Hurriyet newspaper.
It is unclear how the new governor will fare. One Turkish financier described the former executive at the state-owned Halkbank as “smart” but voiced concern about his ability to stand up to the government. Another said that his surname — which means ‘meek’ or ‘malleable’ in Turkish — was a fair representation of his character. He is said to have advocated for a rate cut at the last meeting of the monetary policy committee.
Investors worry that Mr Uysal will now face pressure to sharply cut rates at the next MPC meeting on July 25 — a move that they say would exacerbate the deep problems in the economy. “The move will lead to a much weaker currency,” said Abbas Ameli-Renani, a portfolio manager at the asset manager Amundi.
Paul McNamara, a fund manager at GAM, said he feared that Mr Erdogan was bent on pursuing “growth at all costs”. He warned: “If they’re going to try and short circuit the recession by trying to pile more loans into a weak economy, that’s the scenario where things can start to go quite seriously wrong in Turkey.”
The upheaval at the central bank comes as Turkey prepares to take delivery of a Russian S-400 air defence system that risks triggering US sanctions and spooking the financial markets.
Durmus Yilmaz, a former central bank governor and deputy chairman of the opposition IYI party, said Mr Uysal had a “very difficult” road ahead of him. He said: “If he wants to behave differently [from the government’s wishes], his outcome will be no different from Mr Cetinkaya’s.”