Turkish President Recep Tayyip Erdogan has promised a team with “international credibility” to manage the nation’s finances. Given his influence over everything from interest rates to infrastructure, how much credibility remains is unclear as market pressure builds.
(Bloomberg) — Turkish President Recep Tayyip Erdogan has promised a team with “international credibility” to manage the nation’s finances. Given his influence over everything from interest rates to infrastructure, how much credibility remains is unclear as market pressure builds.
A new cabinet is expected to be named at the end of the week after Turkey’s longest-serving leader extended his rule by another five years. The most significant potential appointment would be Mehmet Simsek, a former finance minister who advisers to Erdogan have been courting to oversee economic policy, people close to the matter said.
Investors have bemoaned Erdogan’s maverick approach, underpinned by his belief that the only way to tackle inflation is to cut borrowing costs and grow the economy. The key question for the outside world is whether more Erdogan means more of the same or whether Turkey will shift toward policies that are more attuned with global economics and his NATO allies.
The lira extended its slump to record lows after he prevailed in a runoff vote on Sunday to complete a triumph that opinion polls hadn’t predicted a few weeks ago. It weakened another 1% earlier on Tuesday to 20.31 per dollar.
The main issue is Turkey’s external financing, with the country having depleted its foreign currency reserves and with more than $200 billion of debt payments coming due. There’s also the prospect of more tension with Western governments as Turkey continues to assert its independence in the east versus west power struggle over everything from trade to the war in Ukraine.
“Despite the economic challenges faced by Turkey, Erdogan is unlikely to delegate responsibilities and soften his highly personalized style of rule,” said Anthony Skinner, head of research at global advice firm Marlow Global. “He may appoint one or two senior officials who are palatable to the markets, but it is clear who will continue calling the shots.”
Simsek, 56, a former Merrill Lynch strategist, has asked for the autonomy that would allow him to put the country’s finances back on track, the people said. They asked not to be identified citing sensitivity of the matter.
Erdogan’s spokesman Ibrahim Kalin told AHaber TV on Monday that Simsek would “continue to contribute to policies on economy” regardless of whether he became part of a new cabinet. Simsek, who joined Erdogan on the campaign trail earlier in the month, said he wasn’t seeking a return to “active politics.” Erdogan and Simsek met in Ankara on Monday, according to two people familiar with the discussions.
Ceding Control
The power that Simsek demands is mostly about monetary policy, which has been in line with Erdogan since the new central bank governor took over in March 2021. The gap there may be too big to bridge, the people said.
The ruling AK Party’s outreach to Simsek is already making waves in national media. Pro-government newspaper Sabah said Erdogan was planning to bring back the old guard to run Turkey’s economy. Former Ministers Cevdet Yilmaz and Lutfi Elvan would both take part in the new economic administration under Simsek, according to one of its top political commentators.
Erdogan’s grip on the economy was cemented with a constitutional overhaul in 2017. He abolished the office of prime minister and consolidated all executive power, wielded by his handpicked inner circle. Central bank governors were appointed and dismissed, finance ministers likewise.
The economy grew 5.6% last year, one of the fastest rates in the Group of 20. Inflation, though, hit 86% — and the central bank kept cutting the cost of borrowing. Prices are rising at half that pace now, yet still by more than anywhere in the G-20 except Argentina.
Investors have gotten used to an unpredictable mix of regulations and interventions that prompted many to dump Turkish securities. Total foreign holdings of stocks and bonds plummeted by about 85%, or nearly $130 billion, since 2013.
Foreign Policy
Erdogan, 69, extended his 20-year rule after defeating rival Kemal Kilicdaroglu by 52% to 48%. That victory was set in motion two weeks earlier when Erdogan defied expectations to secure a significant lead in the first round while his alliance of parties garnered a majority in parliamentary elections.
On the horizon are local elections next year. Erdogan and his AK Party are aiming to wrest back control of the biggest cities of Istanbul and Ankara from the opposition. That makes government spending cuts or other austerity measures unlikely, according to economists.
In turn that will affect foreign policy because Turkey has been reliant on money from Russia and the Gulf states to help prop up the lira, said Ozgur Unluhisarcikli, Turkish head of the German Marshall Fund of the United States. “Making sure the support from these countries will remain is a priority in the upcoming period,” he said.
Erdogan’s new term signals a diplomatic thaw as Turkey works to repair strained ties with the Arab world from Syria to Egypt as well as NATO allies, including neighboring Greece and the US.
Turkey and Egypt have agreed to upgrade diplomatic relations and appoint ambassadors and reopen their respective embassies after years of friction. Under the auspices of Russia, Turkey has engaged in security talks with Damascus in the first sign of a rapprochement between the neighboring countries since the Syrian civil war started in 2011.
On the western front, Erdogan on Thursday is expected to attend the European Political Community Summit in Moldova. Turkey is under pressure to ratify Sweden’s bid to join NATO. Erdogan’s administration first wants to see Stockholm’s implementation of revised terrorism legislation that is due to go into force this week.
“Since the election period is over, Erdogan may get softer in his nationalist stance and can become more liberal and pragmatic in international relations,” said Defne Arslan, senior director at the Atlantic Council in Turkey. “This means that Turkey can a green light to Sweden’s accession in the upcoming NATO summit.”
–With assistance from Cagan Koc, Beril Akman and Selcan Hacaoglu.
(Updates with foreign policy in final section)
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