Jonathan Spicer and Nevzat devranoglu

ANKARA (Reuters). President Tayyip Erdoan’s government hopes that Turks can endure the rising living cost for a few months more before inflation eases and tourists start arriving, which will help to end the winter currency crisis.

It is risky considering that small protests against the plan have already begun in the face inflation of nearly 50% annually, as well as the fact that many economists expect wage and price increases to remain throughout the year.

The U.S. Federal Reserve tightening of interest rates could also make the lira vulnerable. A Russian military intervention into Ukraine, for example, would be a serious threat to Ankara’s relationship with Moscow or NATO.

Erdogan’s push for unconventional rate cuts last year caused crisis, but Erdogan has since regained some investor confidence with the help of both costly market interventions and state-backed deposit guarantee.

This has given the government the time it needed to allow sales tax cuts to work in the cooling of prices to ease consumer pain, and to increase Turkey’s exports with low borrowing rates and capital injections planned into state lenders.

Ankara anticipates that those actions, along with newfound liquidity and base effects, will cause annual inflation in the spring or early summer to rise to approximately 24%. This is well below analyst forecasts.

Turkey’s former leader for 19 years faces high stakes as he is up against an election in mid-2023, which current polls show he could lose.

Analysts and ratings agencies agree that the budget will be able to finance such measures, however costs and inflation can spiral if the currency is under increased pressure. Instead of raising interest rates, it would be better to control inflation and boost the currency.

Erdogan’s experiment in a new currency is at risk because the real rate of interest has fallen to 35%. Official reserves have dropped to deep red in accounting for swaps.

Anupam Damani is the New York-based Head of International Debt at Nuveen.

Erdogan has set his primary goal to close the chronic current accounts gap, which was near $15 billion in 2013. This would help replenish the official reserves and possibly aid the lira. Early signs suggest that he might be able to achieve some success.

Ankara anticipates tourist visits to Turkey to return to prepandemic levels in May as the country’s beaches start to fill up. The sector accounts for nearly 10% of Turkey’s GDP and is expected to bring in close to $34Billion in revenue. According to Turkey’s car rental company, the size of its fleet should increase 25% by this year. This is in line with visitor expectations.

It is common for Turkey to have surpluses on its current accounts in summer, but then fall back to deficit in winter. This may be a problem that will need to be fixed by an export miracle.

CONFIDENCE GAME

The policy rate was cut last year by 14%, and the lira plunged to new lows in December. Inflation rose after that. Since then, however, the depreciation-protected deposits and central bank’s forex sales have calmed markets.

Official data shows that around half the funds have been converted from hard currencies to 350 billion lire ($25.5 billion).

Since December, the exchange rate was in a very tight range at 13.5 to $13. The central bank is far away from December’s extreme swings.

Economists and bankers estimate that the central bank spent $22 billion on December to support the lira and $3 billion in January to do the same. However, this month’s expenditures were almost nothing. Last week, Nureddin Nebati, Finance Minister, stated that there is no need for the central banks to continue to interfere in the markets.

Erdogan promised that he would protect Turks against “crushing” price increases, which include 50% electricity, 55% food, and 76% energy. This month, the value added tax for basic food was reduced and additional relief is possible, perhaps to help with housing.

Nebati encouraged patience and predicted that Turks would see a very different reality around the middle year.

One participant said that he told London’s investors the election would make the economy even more robust and that now is the best time to start investing.

Fitch sent Turkey’s credit rating into junk territory two days later, citing policy that could lead to higher inflation and if market stress continues to shake depositors confidence. Wells Fargo (NYSE:) The lira is the most volatile currency in emerging markets.

Goldman Sachs, NYSE:), also stated that the success of Goldman Sachs’ deposit protection system triggered “a wave” of dedollarization. However, it adds to the state’s currency risk exposure.

An indicator of business confidence will come early next month, when the February data may show an improvement in the trade deficit. This is after January’s record-breaking rise due to soaring import prices and stockpiling. Analysts say this could be a sign of business confidence.

The patience demanded by the government is now wearing thin. In recent weeks, food couriers, nurses, and other workers joined other rallies scattered in various cities to stage strikes.

Esat Celik (32), a 32-year-old Istanbul construction worker who relies on odd jobs for his livelihood, stated that he spends over half of his earnings on food and the children’s necessities. He said that he was currently unemployed to Reuters. It is difficult to keep going like that, but we’ll see how long this lasts.

($1 = 13.5958 liras)