[Global Focus] Turkish Stock Market Soars 200%... A Reckless Experiment

Consumer Prices Soar 8.6%, Retail Investors Flee to Stock Market
Global Efforts to Tackle High Inflation Amid Reckless Monetary Experiments
President Prioritizes Money Supply Over Inflation Control Ahead of Election

[Asia Economy Reporter Haeyoung Kwon] The Turkish stock market surged 200% last year. This contrasts sharply with the significant declines in other emerging markets, including South Korea. Not only emerging markets but also developed markets were hit hard by the aggressive interest rate hikes last year, making the rise of the Turkish stock market even more remarkable.

The secret behind this stock market surge is attributed to an unconventional monetary policy. While other countries raised interest rates to curb soaring inflation, the Turkish government lowered rates. As the currency value fell, funds flowed into the stock market. However, this situation shows no signs of improvement this year, raising growing concerns in the market.

Turkish Stock Market Soars

Turkey's 'Borsa Istanbul 100' index skyrocketed from 1857.65 at the end of 2021 to 5521.17 at the end of 2022. The annual increase last year reached 197.2%. Even when adjusted for the sharp depreciation of the lira and estimated in US dollars, Bloomberg analysis shows the Turkish stock market rose by 110%. This is an astonishing return compared to the Morgan Stanley Capital International (MSCI) Emerging Markets Index, which fell more than 22% last year.

What exactly happened in the Turkish stock market? It was not due to improved fundamentals from local companies' earnings. The most plausible cause can be found in inflation. Investors, worried about extreme price hikes and rapid currency depreciation, rushed to the stock market as a safe haven, causing the market to soar. Especially, Turkish individual investors (retail investors) poured funds into the stock market as a refuge. With inflation in Turkey soaring close to 100%, the value of cash melted away like ice cream in midsummer hands, prompting anxious Turkish retail investors to jump into the stock market to hedge against inflation. This led to one of the world's highest stock market rallies.

Brutal Inflation

Turkey's inflation rate reached a brutal level. As of October last year, the annual consumer price index in Turkey surged 85.5% compared to the same period the previous year, the highest since 1997. The increase slightly eased to 84.39% in November and sharply slowed to 64.27% in December. However, inflation remains at a level rarely seen in any country. Inflation in Istanbul, Turkey's capital, is even higher. The Istanbul Chamber of Commerce announced that the city's annual retail price inflation last year was 93%. Wholesale price inflation also reached 81.31% on an annual basis last year. Although the rapid rise in wholesale and retail prices eased quickly toward the end of last year, the annual inflation rate was close to 100%. Enver Erkan, chief economist at Terra Securities, analyzed, "(Turkish investors) have no other alternatives to make money," adding, "Those who want to hedge inflation and effectively increase investment value have little choice but to rely on the stock market."

Reckless Monetary Policy Experiment

The skyrocketing inflation is attributed to Turkish President Recep Erdogan's reckless monetary policy experiment. His experiment is not only reckless but also irrational. Despite chronic high inflation, President Erdogan pressured the central bank to cut benchmark interest rates repeatedly since September 2021. Due to the rate cuts starting at the end of 2021, Turkey's benchmark interest rate fell by 10 percentage points. During this process, he even made statements contradicting economic common sense, claiming that "high interest rates actually fuel inflation."

While major countries, including the United States, implemented tightening policies to control inflation, Turkey alone made decisions contrary to economic common sense. As a result, the Turkish lira's value against the dollar plummeted from 8.5381 lira in early June 2021 to 13.1278 lira at the beginning of last year and 18.7165 lira as of the 6th of this month. In just a year and a half, the lira's value was halved. As the lira depreciated, Turkey's trade deficit expanded by 138.4% year-on-year to $110.19 billion last year. Exports increased by 12.9%, but imports surged by 34.3%. This was influenced by soaring energy and grain prices and rising import costs. Bloomberg reported, "The government's unorthodox management of an $800 billion economy shows how it sends ripples through asset markets," adding, "Inflation and lira weakness erode the purchasing power of Turkish citizens and push them to bet on the stock market." However, faced with the sharp lira depreciation, the Turkish central bank recently held the interest rate steady at 9% in its latest monetary policy meeting.

An Experiment for the Presidential Election

The reckless monetary experiment targeting the Turkish people is believed to be linked to next year's presidential election. President Erdogan appears to have focused on economic stimulus rather than curbing inflation ahead of the election. Concerned that raising interest rates would slow consumption and dampen the economy, he pursued policies that fueled inflation. Notably, ahead of a verdict, Erdogan announced a 55% increase in the minimum wage and a 25% raise in public sector wages and pensions. He explained these policy announcements by saying, "The consumer price inflation rate fell below the medium-term target."

This means that the soaring inflation was actually below the target. Naturally, the market is skeptical of these announcements. According to ENAG, a research group that investigates Turkey's inflation rate, the consumer price inflation rate last year reached 137.55%, more than double the 64.27% reported for December. The US political media outlet Politico analyzed, "This (December inflation) slowdown may help the president ahead of the election but will not ease the burden on the Turkish people."