The EconomistJuly 13th 2019 Finance & economics 69T
urkey’s economy had just begun to
show signs of recovery. High interest
rates, a measure of calm following local
elections earlier this year and attempts to
rebuild a strained relationship with Ameri-
ca had allowed the lira, which fell by 12%
against the dollar in the first four months
of the year, to strengthen. Inflation had
fallen to 16%, from 25% last autumn.
But in the small hours of July 6th Recep
Tayyip Erdogan, Turkey’s president, put
the progress in jeopardy by sacking Murat
Cetinkaya, the boss of the central bank.
Though Mr Cetinkaya was not widely ad-
mired by investors, his peremptory remov-
al unsettled markets. Mr Erdogan com-
pounded the damage by proclaiming that
high lending rates were to blame for infla-
tion (a view roundly mocked by econo-
mists) and making clear that it was he who
was in charge of monetary policymaking.
“We told him several times to cut interest
rates at meetings on the economy,” said the
president of Mr Cetinkaya. “We said that if
rates fall, inflation will fall. He didn’t do
what was necessary.”
Mr Erdogan scored an own goal, says
Paul McNamara, an investment director at
gam, an asset manager. “The best case is
that they get a lira sell-off that keeps rates
higher than they otherwise would have
been. The worst case is that they set off a
currency avalanche.” Mr Cetinkaya’s sack-
ing showed that hopes of a respite in Turk-
ish politics after the local elections were
misplaced, says Wolfango Piccoli of Teneo,
a risk-advisory firm.
The lira plunged by over 3% against the
dollar when trading began on July 8th, be-
fore recovering slightly. Turkey’s stock-
market index dropped by 1.5%.
Mr Cetinkaya had reportedly been
pressed by Mr Erdogan and his son-in-law,
Berat Albayrak, the finance minister, to use
the bank’s dollar reserves to support the
lira ahead of the local elections. When Mr
Erdogan and Mr Albayrak leaned on him to
cut rates or resign, Mr Cetinkaya declined
to do either—and was shown the door. He
is the first central-bank boss to be sacked in
Turkey since 1981, when an army junta dis-
missed most of the country’s political class
after a coup.
The new boss of the central bank is Mu-
rat Uysal, Mr Cetinkaya’s deputy—who is
off to a terrible start. On July 8th he faced
accusations of plagiarism in his Master’s
thesis (as it happens, on inflation-target-
ing). He has not yet responded to the
claims. Renewed pressure on the lira
meanshewillstruggletocutratesatthe
next meeting of the monetary-policy
board,onJuly25th.Doingsocouldsetoff
anotherrout,saysIbrahimTurhan,a for-
merheadoftheIstanbulstockexchange.
Morebadnewsfortheeconomymaybe
instore.Americahasthreatenedeconomic
sanctionsagainstTurkeyregardingitspur-
chaseofRussia’ss-400air-defencesystem.
(Undera lawpassedin2017,Americacan
punish “significant transactions” with
Russia’sdefencesector.)Despiterumours
ofa compromisebetweenMrErdoganand
PresidentDonaldTrump,officialsinWash-
ingtonsaysanctionsareimminent.The
Russianweaponswerescheduledtoarrive
inTurkeyasTheEconomistwenttopress.
MrUysalfacesa baptismoffire. 7ISTANBUL
The defenestration of the central
bank’s boss risks a currency crisis
Turkey’s economy
Out of the window
L
oan talkswith Belarus; funding for
bridges in Liberia; a possible gas project
in Timor-Leste; accusations of exploitation
in Tanzania; a corporate dispute in India;
pledges to support the Rwandan private
sector. And that was just the past few
weeks. Such is the frenetic pace of China’s
overseas lending that its outstanding loans
have risen from almost nothing in 2000 to
more than $700bn today. It is the world’s
largest official creditor, more than twice as
big as the World Bank and imf combined.
Yet tracking the money is hard because of
limited transparency in its disclosures.
A new study by Sebastian Horn andChristoph Trebesch of the Kiel Institute for
the World Economy and Carmen Reinhart
of Harvard University offers the most com-
prehensive picture yet of China’s official
credit flows (including state-owned
banks). It adds to concern about whether
China has sowed the seeds for debt pro-
blems abroad. They find that nearly half of
China’s lending to developing countries is
“hidden”, in that neither the World Bank
nor the imf has data on it.
The problem is most severe for the most
vulnerable borrowers: the authors con-
clude that in its reporting to the Bank for
International Settlements, an organisation
of central banks, China has disclosed no
loans to Iran, Venezuela or Zimbabwe, de-
spite giving them plenty in the past 15
years. They speculate that China avoids
cross-border claims by disbursing loans di-
rectly to Chinese contractors, so that recip-
ient governments will not misuse funds.
According to the authors, the 50 biggest
recipients now have debts with China
worth about 17% of their gdp on average
(see map), up from 1% in 2005. Strikingly,
many were granted debt relief by wealthy
creditors in the early 2000s after a wave of
defaults. But thanks to China’s largesse
they are now on track to reach the same lev-
el of debt that they had before the crisis.
Whereas the norm for other official
creditors is to lend at concessional terms,
about 60% of Chinese loans are extended at
higher interest rates and shorter maturi-
ties. They often have commodity revenues
as collateral. China has started to talk about
making its loans more sustainable, but
there is little evidence of that so far.
Though China is often depicted as an
unforgiving lender, the study finds that it
has engaged in at least 140 restructurings
and write-offs of external debt since 2000.
Moreover, the boom could soon tail off.
Chinese economic growth and capital out-
flows are closely correlated. As China slows
its lending floodwaters might recede. 7SHANGHAI
Nearly half of China’s credit to poor
countries is hiddenChina’s development financeHey, big lender
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