economics

Transcript: Turkey's President on Monetary Policy, Politics

  • Recep Tayyip Erdogan spoke with Bloomberg in London on Monday
  • Erdogan spoke about interest rates, Halkbank, U.S. relations
Click the image above to watch the translated interview in full.

Turkish President Recep Tayyip Erdogan spoke to Bloomberg TV’s Guy Johnson in a televised interview at Bloomberg’s London Headquarters. He spoke on a visit to the U.K. during which he’s also meeting Prime Minister Theresa May and Queen Elizabeth II, as well as executives, bankers and investors. Erdogan said he plans to assume a greater role in setting monetary policy as he gears up for landmark June 24 elections that will finalize Turkey’s transition to a full presidential system.

Below is a transcript of the interview, with the president’s remarks translated from Turkish:

GJ: There are so many questions about what’s happening with the Turkish lira. Let me put a a simple one to you first. Are you comfortable with the current level of the Turkish lira against the U.S. dollar? Are you happy with where we are now?

Pres.: When it comes to the subject of the Turkish lira, of course the purpose here is not just the status of the Turkish lira, but to protect the values of the currencies of the countries we trade with on the international arena. Therefore, we want to trade with domestic and national currencies and we do this currently with Russia, Korea, China, Iran and this continues in a successful manner. This is how we are able to remove the currency pressure and protect our own currency. There are steps we will be taking in order to do this with other countries too and we have seen its benefit at the first stage and we are seeing it.

GJ: Mr. President, over the weekend you have indicated that you’re looking to lower interest rates after the election. So my question is, why not do that now before the election? And is that giving the green light to the central bank to raise interest rates when it meets next month on the 7th? I’m curious as to the timing.

Pres.: Above all else, of course, my function in the executive as the head of the republic is not the same as a prime minister’s. In the new term, from the moment we move to a presidential governing system, our effectiveness there will be very different. Therefore, I will take the responsibility as the indisputable head of the executive with respect to the steps to be taken and decisions on these issues. We’re going to do this so we can be held accountable for the responsibility we’ve taken. Up until this moment, this was not the case. However, after now the situation will be like that. Of course, our concern is this: when we came to power 16 years ago, we took very important steps on the issue of diversifying resources. When I took over the office, our interest rate was 63 percent and while we are taking this down to single figure levels, the inflation rate, which was 30 percent, also went down to single digits. When it came to single digit levels, suddenly explosions of investments started in my country. Together with these explosions of investments, the per capita national income went up to $11,000, from $3,500. At the moment we don’t find this sufficient. The target is to be able to raise this up to $25,000. For this to happen, investments should increase. When investment increases, employment will increase, production will increase and together with this, our international competitiveness will increase. This is our only goal.

GJ: I’m very curious Mr. President about your thoughts on interest rates. You have spoken in the past about this idea of real interest rates and the fact that maybe where inflation is should match where interest rates are. I’m curious about whether or not you feel the Islamic faith should review its position on interest rates to reflect the fact that maybe what should be the new orthodoxy should be that there should be a real interest rate of zero, i.e. the interest rate charged by the central bank matches the inflation rate in the country, we end up with zero at the end. I want to hear your thoughts about whether or not when you talk about a change in the interest rates framework for Turkey after the elections that this is what you’re talking about.

Pres.: Now, if you look, especially after your explanation, I would like to make this matter open and clear to you. Let me give examples from some countries. For example in recent times, we have seen a very serious development in Argentina. In Argentina, the central bank’s nominal interest rate is 40 percent, current inflation is 25.6 percent, but if you look at the real interest rate, it is 14.4 percent. We look at Russia, the central bank’s nominal interest rate is 7.3 percent, inflation 2.4 percent, real interest rate 4.9 percent. We look at Brazil. The central bank’s nominal interest rate 6.5 percent. inflation 2.8 percent, real interest 3.7 percent. Alongside this we look at South Africa, in South Africa a 6.5 percent central bank nominal interest rate, 3.8 percent inflation, 2.7 percent real interest rate. Now I come to my own country. 13.5 percent nominal interest rate, 10.9 percent inflation, 2.6 percent real interest rate. Alongside this, the U.S. has 1.75 percent but on the other hand, inflation 2.5 percent, real interest rate is negative 0.75 percent. Of course we are in the UK. In the UK the nominal interest rate is 0.5 percent, inflation 2.5 percent and the real interest rate is negative 2 percent. That means it appears that when the interest rate gets lower, you can see where the real interest rate falls to. Of course, here there will be employment, investment, production and the United Kingdom’s investors will have much higher international competitive power. To put it very clearly, this is our target at the moment. In other words, the examples are there in front of us. There is no need to look left, to look right and to rediscover the world. When there are such open, clear examples, why do we get flung left or right? We need to take our steps accordingly. And our finance sector must balance itself according to this.

GJ: Do you think that real interest rates should be zero? Are those your thoughts that there should be no difference between the consumer price inflation and the interest rates? Do you think that would be good for Turkey or you think that it needs to be almost a negative real rate. It’s interesting that you draw that spectrum between those different countries. Do you think and I’d be curious as to know what you think that number should be zero.

Pres.: It would be wrong to assess the matter as a matter of zero. Let us look at the matter from here. First of all when you look at the cause and effect relationship, the interest rate is the cause and inflation is the result. The lower the interest rate is, the lower inflation will be. First of all we need to adjust this well. What is the target in the interest rate? It is the real interest rate. OK, what is the real interest rate? The real interest rate is the difference between the interest rate and inflation. The moment you catch this, what do you do with the real interest rate anyway? You take it down in a substantial sense. The moment we take it down to a low level, what will happen to the cost inputs? That too will go down. Well! As soon as the cost input goes down, you either domestically or in the international markets, you will be able to get the opportunity to sell your products at much lower prices and obtain competitiveness. The matter is as simple as this.

GJ: When the decision is made on interest rates, are you consulted? How does the process work? Do they take your opinion, the central bank, when they are making a decision on interest rates?

Pres.: At the moment of course either that way or this way, you are the head of the executive in the country. Of course our central bank is independent. But the central bank can’t take this independence and set aside the signals given by the president, who’s the head of the executive. It will make its evaluations according to this, take its steps according to this. And I believe this will result in very beneficial steps in the future.

GJ: We saw data on the Turkish current-account earlier and it was a little wider than anticipated. I’m curious as to where you see the countries that are going to fund the current-account deficit will come from. You have in the last few years made close friends in Russia and in Iran. Yet those are the kind of countries, given their external balances, that are unlikely to support Turkey’s current-account deficit. Who are you looking at to fund that deficit, to generate the flows that are going to come in. It’s unlikely to be Russia and it’s unlikely to be Iran.

Pres.: Now, first of all we need to discuss this very sincerely. Of course the number one reason for our current deficit is the fact that we are a country dependent on petroleum, natural gas. In other words petrol and natural gas incites, encourages our current-account deficit. Of course, however much we can lower the natural gas, petrol, our current-account deficit will be lowered by that much. However, alongside this, of course Turkey is becoming much stronger by the day in industrial production and the defense industry. When we get stronger here, we will come to a state where we will cover our current-account deficit through industry. This is the unseen face of Turkey at the moment. The developments in this respect are going quite well.

GJ: One of the areas in defense that you could be potentially getting stronger very shortly is with the arrival of S-400 missiles -- the surface to air missile defense system. The indications are that Turkey will face sanctions from the U.S. as soon as those missiles arrive in Turkey. Are you prepared to pay that price for that missile system? Do you anticipate that the U.S. would impose sanctions were those missiles to be imported from Russia? And what do you think those sanctions would look like? Would they affect you, would they affect your team, the Turkish people, the financial system. How would they work?

Pres.: Right now as it is known we are a country which is a member of NATO. However, in NATO at the moment, Greece is an ally and as it is known, Greece bought S-300 missiles from Russia. Well, has anything been said to Greece about S-300s? It hasn’t been. On the other hand, of course the general secretary of NATO Mr. Stoltenberg said about the decision Turkey has taken regards S-400s that "it is our ally’s own choice, they can make such a decision." At the moment we have the freedom, the independence to buy our defense needs from allies, from any country. If we can’t go and get it from the U.S., if the Senate is not allowing this, or Congress is not allowing this, are we not going to find a solution for ourselves? Of course, we will find a solution for ourselves. Right now we have steps we will take and are preparing to take and we will take these steps. In fact, we have held and will have talks with Rolls Royce, we will takes steps with them on this issue and we are continuing to take steps. At the moment they are also included in our talks packages.

GJ: Just to be clear, you’re not anticipating that there will be sanctions as a result of your proposed purchase of S-400? That’s not something that you think will happen?

Pres.: Right now whether the U.S. would enter in to such sanctions or not, I don’t know. But there’s only one thing I know. We’re buying the products that I consider to be strategic such as natural gas and petroleum from Russia. We can’t cut off our ties with Russia in that respect. If we’re allies with the U.S., we need solidarity, not sanctions. Are we not together in NATO at the moment? We are together. In that case, the U.S. should not impose sanctions on us, but should lend support in solidarity. You will give support to terrorist organizations, but impose sanctions on Turkey. Can such a thing happen? You see unfortunately, in Northern Syria 5,000 truck loads of weapons and ammunition arrived. 2,000 cargo planes full of weapons and ammunition arrived. Who brought these? The U.S. And I said this to them openly and clear and they said "we are taking down the serial numbers of all of these. After the war is over we will collect them." We have seen these in Iraq before. You could not take them in Iraq, you did not. And they were left in the hands of the PKK. Later in the struggle there we collected these, took them from the PKK. How are we going to reconcile these realities with our alliance? How could we be allies as such? We want sincerity at this point. When there’s sincerity, there’s no issue.

GJ: Would you say you have a productive relationship with President Trump?

Pres.: We haven’t had a problem up to now. But that doesn’t mean there aren’t areas where our thoughts don’t align, there are.

GJ: Can I talk about Halkbank for just a moment? There has been a conviction in the U.S. for that institution which is for helping defeating sanctions when it comes to Iran. I would like to ask whether or not there are negotiations currently underway regarding a fine for Halkbank and were there to be a fine whether or not that fine would be paid?

Pres.: Of course, right now a great injustice is being done against Halkbank. Especially Hakan Atilla is in no way a criminal. Hakan Atilla is a friend of ours who has been regularly visiting the U.S. and has been detained in his last, or his sixth visit, without any crime existing. There should be no such injustice. At the moment, unfortunately, he is there in detention. He remains in custody, waiting for his fate. The courts are continuing in a different way and I don’t know what result will come out of this. There is a judicial procedure and the lawyers of Halkbank especially are following this judicial process. I hope it doesn’t yield a result that will completely destroy Turkish-U.S. relations.

GJ: You talk about it being an injustice. If it is an injustice, would you as a country be prepared to pay a fine around it? You talk about it being an injustice. If you believe that, will you pay a fine? I’m curious as to whether or not that fine gets paid ultimately.

Pres.: Of course at the moment it would be wrong to say something before the result comes out. Let’s see the result first. But, Hakan Atilla is definitely innocent. So we want his acquittal, because there is no crime. There is no crime they are able to allege. It’s not something acceptable to accuse such a person with crimes. Also, If Hakan Atilla is going to be declared a criminal, that would be almost equivalent to declaring the Turkish Republic a criminal.

GJ: Sorry to dwell on the point, but if that is your point and the Turkish state were to be declared a criminal, would the Turkish state be prepared to pay the fine?

Pres.: Of course, it’s not possible to say anything before seeing the result that will come out. Let the result appear first. After the result, of course our bank will do what the laws require them to do.

GJ: Can I ask a little bit about what the economic team is going to look like after the election? There are some suggestions in financial markets that your colleague Mehmet Simsek is going to be departing. I’m wondering whether or not there will be somebody who the financial markets know and trust who will be taking his place? I’m also wondering whether you are going to be playing a greater role in economic policy going forward and a greater role in setting monetary policy going forward as well?

Pres.: Above all else, it will be wrong to talk about these issues at the moment. The whole question is to see beyond the 24th of June. Because after the 24th of June, the scene within and outside of parliament will be different. If you look at the U.S., as is known, you can see that those in parliament do not take part in the cabinet. Is it not the case? Therefore, we too may form a cabinet with those not from within the parliament but from outside the parliament. But it also has to do with the balances within parliament and outside parliament. Let’s see the picture and we will of course take our steps according to that.

GJ: But I think we’re all curious to know what role in particular you’ll be playing. We have talked about earlier on in the day. Do you see yourself playing a greater role in setting monetary policy? Is this something that -- you talked about this big change that is coming when it comes to monetary policy. Is part of that big change the president playing a greater role in setting monetary policy?

Pres.: Now first of all, you are the head of the state; When the people fall into difficulties because of monetary policies, who are they going to hold accountable? They’ll hold the president accountable. Since they’ll ask the president about it, we have to give off the image of a president who’s influential on monetary policies.

GJ: So you will play a role in monetary policy going forward. Is that the big change?

Pres.: Yes! This may make some uncomfortable. But we have to do it. Because it’s those who rule the state who are accountable to the citizens.

GJ: You hold very, let’s call them unorthodox from an outsider’s point of view, view of monetary policy. Turkey’s monetary policy, if you are to play that greater role, is going to be run on a very different basis from the rest of the world. Is that something that you’re comfortable with?

Pres.: While doing all of these of course we are not doing them to disturb some circles on an international level. But, we take these steps in order to protect my country’s interests, we will do whatever my country’s interests require.

GJ: I’m curious as to how you think it will work. How your relationship with the governor of the central bank will change? How will that relationship operate?

Pres.: At the moment, however the central bank’s relations are continuing at the moment, they will continue in the same way. We aren’t new to running the country, we have not taken over the government recently. We have been running this country for 16 years without interruption.

GJ: You said earlier in the interview that Turkey has an independent central bank. And you talked about the fact that it will carry on and that things will be the same. Will Turkey, with your greater role in monetary policy, still have an independent central bank?

Pres.: Above all else, not just Turkey, we will apply the same governance in Turkey in the same way as it’s applied globally. Today whatever the governance approach in the U.S., or Europe, we will apply the same in Turkey as well. What is legitimate for them cannot be illegitimate for us. Everyone should know this. And we will take our steps accordingly. But we will never let our country lose.

GJ: The comparison with the U.S. -- is your assessment that President Trump and Jay Powell, who’s the chair of the Federal Reserve, does the president speak to Jay Powell about interest rates, do you think? Is that something that happens elsewhere? Because you’re implying that you’ll be taking a much greater role. Is there another example of where you can see a model working for Turkey? Is there a country that stands out?

Pres.: No, there is no need to argue. The U.S. interest rate policy is known. We don’t need to reinvent it because we know that we have all the information to hand. In other words, we know what the interest rate policies are and are not in all the countries in the world. We are not just discovering them now. Therefore, of course we will take our steps accordingly. We will make our assessments according to this. I mean, we assess what it is in the US, what it’s like in Argentina, Mexico, Brazil, Germany and Britain. We always make this assessment and we will continue doing so. And we will make our own decision accordingly.

GJ: I’d like to talk a little bit about politics and what’s going to happen in the upcoming elections. We have a presidential election, we have a parliamentary election. If you were to find yourself in a situation where you won the presidential election but we end up with a more mixed picture when it comes to the parliamentary election, as it did in 2015, would you call another round of elections to make sure you secure a parliamentary mandate that the system is almost designed to be set up with?

Pres.: Of course now we have a saying: you do not fold your hems before seeing the stream. We have such a saying. Now there is no point at all to folding the hems before seeing the stream. Let us see the results first. Of course we will certainly have preparations for a result in the way you described. But for the matters to develop exactly in the way we planned, I mean Plan A, Plan B, Plan C, of course all of these will happen. But it looks at the moment like we are doing well, 40 days later, a plan as we wished will emerge and 40 days later Turkey will wake up to a much more different era.

GJ: Is the system you have established -- does it only work when the AK Party wins both elections? The presidential election and the parliamentary election. The system you designed, does it only work at that point and one part doesn’t fit into that and the system as a whole doesn’t work?

Pres.: At the moment we have done our homework well, we are working well and we would not allow a development which will not let the system work. In any case, there were some people who clogged the system after June 7. As the head of the republic I opened the blockage of the system and immediately, November elections were called. In November, our people said this can’t happen and brought the AK party back to power again on its own. The system started functioning again.

GJ: Just to stay with politics a moment longer, what do you think the result will be in the region of the re-imposition of sanctions on Iran by the U.S.?

Pres.: Naturally, we are fed up of hearing about these sanctions continually. The U.S. sanctions on Iran are not new, of course. As you know, they imposed a sanction previously too. But we do not find this to be right for the sake of the peace of the region. Because, as the International Atomic Energy Agency’s statement says in respect of the nuclear issue "Iran is a country which fulfilled its obligations." In that case, on what basis do you punish Iran now? These are not right. And also, there has been a procedure that was in place during Mr. Obama’s term. And in that process, everything was normal. But when Obama leaves office, then Iran is punished through a new practice. Now these are not right. And all of these result in tensions in the region. Not contributing to the region’s peace and we do not want this region to go into tensions. Also this region is now tired. At once, let’s establish peace in the region and contribute to a peaceful world altogether. You see, the step of declaring Jerusalem as Israel’s capital is a very serious step towards tensions in the region. We’re looking at the number of people who were killed in the Gaza Strip. It’s a disaster. 37 people, in fact I believe more, died and hundreds of people are wounded and these people were wounded by real bullets. How could this happen? 700 people are now wounded in Gaza. This can’t happen. There are two people responsible: Mr. Trump and Netanyahu.

GJ: Russia and Israel: Is there a geopolitical shift that’s taking place in the region?

To be honest, I have not yet understood what the shaking of hands between Mr. Putin and Mr. Netanyahu will bring or will take away.

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