With the election of the orthodox Simsek, the Turkish President Erdogan signals an economic turnaround

• Erdogan begins a new five-year term after winning the runoff
• Unorthodox rate cuts had exacerbated the cost of living crisis
• The economy is under great strain, Simsek sees a turnaround

ANKARA, June 3 (Reuters) – President Tayyip Erdogan signaled on Saturday that his newly elected government would return to more orthodox economic policies when he appointed Mehmet Simsek to his cabinet to address Turkey’s cost of living crisis and other strains.

Simsek’s appointment as finance and finance minister could set the stage for rate hikes in the coming months, analysts say — a clear reversal of Erdogan’s long-standing rate-cutting policy despite rising inflation.

After winning a runoff election last weekend, Erdogan, 69, who has ruled for more than two decades, began his new five-year term by urging Turks to put differences aside and focus on the future.

The new Turkish cabinet also includes Cevdet Yilmaz, another orthodox business executive, as vice president and former head of the National Intelligence Organization (MIT) Hakan Fidan as foreign minister, replacing Mevlut Cavusoglu.

Erdogan’s inauguration ceremony at Ankara’s presidential palace was attended by NATO Secretary General Jens Stoltenberg, Venezuelan President Nicolas Maduro and other dignitaries and senior officials.

The apparent reversal in the economy comes as many analysts say the major emerging market is poised for turmoil on the back of depleted currency reserves, an expanding government-backed deposit insurance system and unrestrained inflationary expectations.

Simsek, 56, was highly regarded in the financial markets when he was finance minister and deputy prime minister between 2009 and 2018.

Reuters reported earlier this week that Erdogan would almost certainly put him in charge of the economy, marking a partial return to free-market policies after years of increasing government control of foreign exchange, credit and debt markets.

QUESTION OF INDEPENDENCE

Analysts said that after previous episodes in which Erdogan turned to orthodoxy only to then quickly return to his rate-cutting habits, much would depend on how much independence Simsek is granted.

“This indicates that Erdogan has recognized dwindling confidence in his ability to deal with Turkey’s economic challenges. But while Simsek’s appointment is likely to delay a crisis, it is unlikely to bring long-term solutions to the economy,” said Emre Peker, director at Eurasia Group, which covers Turkey.

“Simsek will likely have a strong mandate early in his tenure, but with local elections approaching in March 2024, he will face rapidly mounting political headwinds that will require policy action to be implemented.”

Erdogan’s economic program since 2021 puts the emphasis on monetary stimulus and targeted loans to boost economic growth, exports and investment, urging the central bank to act and severely undermining its independence.

[1/7] Turkish President Tayyip Erdogan greets MPs and guests upon his arrival for the swearing-in ceremony following his election victory in Ankara, Turkey. /Photo taken June 3, 2023/REUTERS/Umit Bektas

As a result, annual inflation hit a 24-year high of over 85% last year before easing.

The lira has lost more than 90% of its value over the past decade after a series of crashes, the worst of which was late 2021. It hit new all-time lows beyond 20 to the dollar after the May 28 vote.

“WAYS TO RECONCILIATION”

Erdogan, Turkey’s longest-serving leader, won 52.2% of the vote in the runoff, defying polls that predicted economic strains would lead to his defeat.

His new mandate will allow Erdogan to continue increasingly authoritarian policies that have polarized the country, a NATO member, but strengthened its position as a regional military power.

At the inauguration ceremony, which was attended by Hungarian Prime Minister Viktor Orban and Armenian Prime Minister Nikol Pashinyan, Erdogan struck a conciliatory tone.

“We will embrace all 85 million people regardless of their political affiliation… Let’s put aside displeasure with the election period. Let’s look for ways to reconciliation,” he said.

“Together we have to look ahead, focus on the future and try to say new things. We should try to build the future by learning from the mistakes of the past.”

Earlier, at the reading of the oath of office, Erdogan vowed to protect Turkey’s independence and integrity, abide by the constitution and follow the principles of Mustafa Kemal Ataturk, the founder of the modern secular republic.

Erdogan became prime minister in 2003 after his AK party won an election in late 2002 following Turkey’s worst economic crisis since the 1970s.

In 2014, he became the country’s first popularly elected president and was re-elected in 2018 after securing new executive powers for the presidency in a 2017 referendum.

The May 14 presidential election and May 28 runoff were crucial as the opposition was confident of toppling Erdogan and reversing many of his policies, including proposing sharp interest rate hikes to combat inflation, which was at 44% in April. lay.

In his victory speech after the election, Erdogan said inflation was Turkey’s most pressing problem.

Writing and additional reporting by Jonathan Spicer; Edited by Frances Kerry, Giles Elgood and Christina Fincher

Our standards: The Thomson Reuters Trust Principles.