Turkey fails to manage

The Central Bank caught the economy world by surprise when it cut interest rates unexpectedly late Wednesday. The currency fell around 3 percent in off-market trade in Asia and the U.S. after the Turkish markets were closed. The reason for this is not only the basic rule that lower rates reduce the value of a currency, but the lack of confidence in economy management.

The central bank failed to manage the rate cut process as it did not even vaguely signal that it could take such a step. No market reports included such an expectation. More importantly, nobody was aware of this possibility. The bank had breached the basic principle of the inflation targeting system, which is managing expectations. The bank failed to communicate with market players as well as opinion makers in the economy by not leaking the possibility of such a move.

Unpredictable
Global central banks are always predictable in making similar decisions and the expectation is always seen as a done deal. In Turkey, it took 12 hours for market players and investors to understand the reason for the cut, which came at a time when the YTL was already faltering and inflation hovered well above the official target.

The government, however, was "more successful" in managing the International Monetary Fund, or IMF deal expectations as yesterday's newspapers were covered with the stories that a new deal with the fund would include $25 billion to $40 billion of loans. It is likely that this news was leaked to economy officials before the press. However, what the government did was sacrificing a reassuring stance to populist policies ahead of the local elections.

Prime Minister Recep Tayyip Erdoğan has long vied to be the leader who cut his country's links with the IMF, an unpopular symbol of economic crisis and financial bottleneck. The government had therefore dragged its feet in deciding the future relations with the Fund after the previous stand-by expired in May.

The longer the decision was delayed, the tighter the conditions of the new deal became. Only a couple of weeks ago, Erdoğan said Turkey does not need more help from the IMF to fight the credit crisis, despite growing pressure from business associations. He even went a step further by accusing the fund of "squeezing Turkey's throat by curbing needed spending." This was the latest indicator that the Turkish authorities have been ignoring the importance of the global crisis. Erdoğan previously said, "Thank God we are in a good position," and then said, "The crisis would not touch us." The main argument he made was that his country did not have an established mortgage system, ignoring the problems that could rise from the lack of global liquidity and the fragilities in the economy.

As of now, the economy management has failed to make the grade. They are not realistic, they U-turn on crucial issues and fail to be predictable on steps that they may take. This does only harm, as investors, as well as the Turkish public, expect to see sound solutions, and officials who know what they are doing.

Thus, it is no surprise that according to a recent poll, the public's confidence in Erdoğan has fallen to an all-time low.