The saying that in life when one door closes, another opens up, could certainly apply to Hafize Gaye Erkan. In January of last year, the native Turk abruptly resigned as co-CEO and heir apparent to First Republic Bank founder Jim Herbert after just seven months on the job.
While her past employer went on to make the mistakes that eventually led to its historic collapse, the 43-year-old later took over as the boss of Greystone.
There the former Goldman Sachs managing director didn’t even last four months before jumping ship again, as the real estate finance firm announced in December she had sought “new opportunities in the financial sector.”
Now it emerges that the Princeton-educated Erkan has been appointed the first woman to run the Central Bank of the Republic of Turkey (CBRT) as President Recep Tayyip Erdoğan reshuffles his cabinet at the start of a third term in office.
There Erkan will need every skill she acquired while earning her doctorate in financial engineering as she faces one of the toughest tasks in international finance around—staving off an impending currency collapse in Turkey triggered by Erdoğan himself.
His decision to keep stimulating the economy in the face of soaring inflation prompted both international investors and indeed the country’s own citizens to flee the lira. Erdoğan even argued the best way to cool off consumer prices was to maintain borrowing costs at as low a rate as possible—indeed it became his signature economic policy.
“The first, and only, question media and investors should ask Turkey’s new central bank governor is this: ‘Do you believe higher interest rates lead to higher inflation?’” wrote Turkish political commentator and Erdoğan critic Can Okar on Friday.
Lira-ization strategy unveiled to urge Turks not to dump their own currency
The CBRT has instead blamed Turks themselves for painfully high inflation, most recently measured at an annual 44% in April according to Erdoğan’s own officials. Specifically, it accuses them of thwarting the central bank’s price stability mandate by preferring to buy and hoard gold, cryptocurrencies, the U.S. dollar, or other governments’ fiat currency.
In the week before Turkey’s second-round election on May 28, Turkish Lira fell around 1% against US Dollar. In the week since then, it’s fallen 16%. It’s good when a currency falls if it needs to. It’s not good when that fall is postponed until after a political turning point… pic.twitter.com/dmlC7JV7KQ
— Robin Brooks (@RobinBrooksIIF) June 7, 2023
The lira, abbreviated as TRY, fell into such disrepute among its citizens that the CBRT was forced last year to launch a dedicated “lira-ization” strategy to encourage the country to use its own legal tender rather than rely on others.
“The aim is to gradually increase the weight of TRY-denominated items in the assets and liabilities of households, companies, and the banking sector, so that the financial system as a whole becomes centered on the Turkish lira,” the outgoing CBRT governor, Şahap Kavcıoğlu, wrote in December.
It’s hard to blame Turks for wanting to abandon their currency. Thanks to Erdoğan’s mismanagement of the economy, the lira weakened by 44% versus the dollar in 2021 and a further 30% last year.
As a result, the shortfall in its current account ballooned to a record $10 billion in January as imports soared. The country was forced to temporarily limit the purchase of gold, a popular store of value, the following month.
Currency reserves exhausted
In order not to further alarm voters ahead of May’s all-important presidential election, the CBRT plundered the country’s foreign currency holdings needed to finance its yawning trade deficit just to prop up the lira.
In the process, net international foreign exchange reserves actually dipped into negative territory for the first time in the 21 years that Erdoğan and his ruling Justice and Development Party (AKP) have run Turkey.
With its coffers depleted and Erdoğan safely returned to power, the CBRT has allowed the lira to resume floating freely—and the result has been devastating.
Since winning the election, the lira has been in free fall, plummeting by more than 15%.
The job of rebuilding trust in the currency now falls to Erkan.
After departing two CEO-level jobs in 10 months, she will hopefully want to last longer this time, but she shouldn’t get all too comfortable settling down in her new job.
The post of central bank governor is a notoriously fraught and contentious one that comes with a built-in ejector seat for Erdoğan’s political convenience.
The AKP has its sights set on municipal elections next March, and the greatest trophy would be defeating Istanbul Mayor Ekrem Imamoğlu, the most popular political opponent of Erdoğan.
If that means more interest rate cuts to boost growth, no one—not the financial markets and certainly not Erkan—will stop him.