Recep Tayyip Erdogan has appointed Mehmet Simsek as his new finance minister, in a sign that the Turkish President may be prepared to pursue more orthodox economic policies.
Simsek, a former economist at Merrill Lynch, is widely respected by foreign investors and is seen as a market-friendly choice by Erdogan. While the Turkish President is known to subscribe to unconventional monetary views – primarily his belief that higher interest rates fuel inflation – Simsek is a much more orthodox figure. With inflation in Turkey currently running at 44%, the Turkish lira trading at record lows, and the central bank burning through its foreign reserves, Simsek has indicated that he will return to “rational” economics.
Timothy Ash, an Economist that has covered Turkey throughout Erdogan’s time in power, told Disruption Banking that the move is encouraging but that “the concern is how much authority Simsek will have to make decisions.” He pointed to the experience of Naci Agbal, an orthodox former governor of the central bank who was sacked after only four months in office.
However, Ash said that “some reassurance can be taken from the fact that the broader cabinet is moderate and reasonably Western leaning.”
“I think we’ll be watching for the appointment of the central bank governor,” Ash said, with banker Hafize Gaye Erkan expected to take the role, another conventional figure. “If it is Erkan, I think that would give Simsek safety in numbers. Turkey would then have a very credible finance minister and a decent central bank governor, and then hopefully they can get on and do what’s needed.”
Why is Erdogan changing course – given how deeply held his unorthodox economic views are? Ash suggested that his election win offers Erdogan “a huge amount of political capital to hand over some authority to others in the team.”
Ash also said that “it’s pretty clear to most observers that Turkey faces going over a cliff if the policies continue. The imbalance is just so huge, and the reserves are so limited that Turkey faces a maxi-devaluation and systemic banking crisis unless he acts now.”
“I think the message has got through to him and he has some sensible people around him,” Ash added.
Markets have reacted positively to the news. In the five-year credit default swap market, the best gauge of risk levels in Turkish markets, yields have fallen from a high of around 700 after the first round of the election to 515 this morning. This tightening reflects a lower perceived risk of Turkey defaulting on its debts.
The Istanbul Stock Exchange Index has also rallied almost 15% since election day as optimism grows that Erdogan could finally be changing course on economic policy.
Author: Harry Clynch