One step forward, several steps back in Turkey

On Friday, a Turkish judge released Andrew Brunson, the US pastor at the center of the confrontation between President Trump and Turkish President Recep Tayyip Erdogan. Brunson had spent two years in jail for spying and supporting the failed coup of 2016. News of his release has optimized Turkish holdings: 10-year government bond prices have risen by nearly 12%. And in the beginning, the currency had gained almost 3% against the dollar.

Yet by the end of the day, the lira had yielded most of this gain. So what gives? Before this diplomatic advance, Turkish officials had taken several steps back economically.

This is the problem that the Turkish government has had to solve. In August, the Trump government imposed sanctions on two senior Turkish government officials. He then dubbed tariffs on the country's steel and aluminum exports to the United States in order to force Brunson's release. The crackdown took place in the midst of a monetary crisis caused by President Erdogan's refusal to heed economic orthodoxy. For a while, the lira plunged almost every day to new record highs against the dollar.

In September, things improved. A few hours after President Erdogan called interest rates an "operating instrument", the Turkish central bank, which had lost its credibility in July when it refused to raise rates, shocked markets by raising interest rates. rate of 625 basis points, at 24%. This decision was welcomed by investors and raised the hope that the central bank could recover some of its independence.

Turkey's finance minister (also Erdogan's son-in-law), Berat Albayrak, then organized a traveling exhibition aimed at boosting market confidence. He has met with investors in London and New York, pledged to cut public spending by nearly $ 10 billion and is committed to maintaining weak but sustainable growth. He also called on McKinsey & Co, an investment consulting firm and US partner, to help set up a new economic program.

In a few days, however, everything has collapsed:

First, President Erdogan fired the deputy director of the Turkish Statistical Institute (TurkStat), which produces the inflation figures, after inflation has reached its highest level in almost 25% in 15 years:

Then he ordered his ministers to sever ties with McKinsey for his Western connection. "It's not necessary," he says. "We are enough for ourselves."

After that, Erdogan gave up a vital lifeline for the economy if the situation deteriorated further: the IMF. In a speech, he said that Turkey had "closed the book on the IMF, not to be reopened".

In the wake of this announcement, Erdogan announced that he had chosen several unorthodox advisers to sit on his new economic policy committee, including one who had previously pledged to do "exactly the opposite" of the recommendations. IMF.

Finally, Finance Minister Albayrak unveiled an anti-inflation plan, which GAM's Paul McNamara called the FT "absolutely crazy". To control prices, Albayrak has asked companies to lower prices by up to 10% and fund those who do. To find these shops, it is enough for the Turks to look for a sticker with a special logo on the window.

For Timothy Ash of BlueBay Asset Management, the plan has a "Venezuelan flavor under Maduro and Chavez" and we all know how it worked. While reform advisers are losing ground, the implications for Turkey are potentially catastrophic if the country continues to implement half-baked policies and is only "getting by", has it? -he declares. "But given the huge challenges Turkey faces, embarrassment is not enough and risks failing."