[1/3] A logo of the Central Bank of Turkey is pictured at the entrance of its headquarters in Ankara, Turkey, October 15, 2021. REUTERS/Cagla Gurdogan/File Photo
LONDON, May 29 (Reuters) – Turkey’s re-elected President Tayyip Erdogan’s top political figures take center stage as markets try to gauge whether he will change course towards economic orthodoxy or tighten policies widely seen as unsustainable.
It is widely expected that Erdogan will use his election victory on Sunday to launch a sweeping cabinet reshuffle that could potentially transform finance, economics and central bank leadership as his rule enters his third decade.
Foreign investors have shied away from Turkish bonds and stocks in recent years as the economy reeled from boom-and-bust cycles, rampant inflationary spurts and a currency crisis that caused the lira to lose more than 90% over the past decade. On Monday, the lira fell to a new record low.
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Erdogan’s increasing interventions to stabilize the lira and his insistence on ultra-low interest rates have increased pressure on Turkey’s government budget and financial sector. With reserves dwindling, few doubt that change is inevitable. But how far-reaching and significant these will be remains uncertain.
“In an environment with highly centralized decision-making, the market will only pay attention to a change in the economic team if that change signals a decisive turn in policy making,” said Emre Akcakmak of asset manager East Capital, which invests in Turkey equities.
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Disagreements erupted over economic policy in the days leading up to Sunday’s vote, as members of the ruling party met to discuss how they could introduce a new policy of gradual rate hikes and a targeted lending program.
“The final decision on the position of finmin (finance minister) is likely to send some strong signals for economic policy in the new term,” said Barclays’ Ercan Erguzel, noting that there have been efforts to bring back former finance minister Mehmet Simsek, who held the office was well appreciated by the markets.
“If markets soon see the appointment of Simsek or a similarly orthodox figure, expectations of a speedy return to orthodoxy would be heightened.”
Others feared that the scars left by a revolving door on key economic and monetary institutions would remain. These personnel changes came as Erdogan sidelined technocrats and undermined the institutional capacity of the central bank and finance ministry.
In the past four years, four governors have headed the central bank.
“Surrounded by supporters seemingly chosen for their loyalty, there is a risk that the reasonable voices that still exist in the AKP are now too distant to influence Mr Erdogan’s decision-making,” Roger Mark said , analyst at fund manager Ninety One.
Erdogan has offered little guidance on how economic policy will be shaped in the coming weeks and months, although he acknowledged some problems the country of more than 80 million people is facing.
“The most pressing issue in the coming days is to alleviate the problems stemming from inflation-caused price increases and make up for the loss of prosperity,” Erdogan said in his victory speech in Ankara, forecasting inflation to hover around 44% in April – would fall, as would interest rates.
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Tuncay Tursucu, founder of Tuncay Tursucu Research and Consulting, said Erdogan’s speech emphasized “internationally recognized financial management” and raised hopes for political change.
“However, for this increase to be sustainable, it is necessary to appoint the cabinet, clarify the names that will be included in the economic line and, if necessary, announce a new roadmap for the economy,” Tursucu said.
Pre-election optimism about a reversal in economic policy largely evaporated after Erdogan’s strong first-round result rattled the polls and laid the groundwork for his third decade in office.
Thomas Gillet, director of sovereign ratings at Scope Ratings, said a partial adjustment to the policy mix is still possible but would require rigorous planning and implementation to be effective.
“However, President Erdogan has shown little sign of such a reversal,” Gillet said.
Reporting by Karin Strohecker and Libby George in London, additional reporting by Canan Sevgili in Gdansk, editing by William Maclean
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