Financial market waiting for a turnaround
New finance minister brushes off Erdogan
By Max Borowski
6/5/2023 5:42 p.m
Mehmet Simsek should win back the trust of the financial markets in Turkey and its currency for Erdogan. The new minister has harshly distanced himself from the president’s previous policies. But that’s not enough.
What local and international investors expect from the new term of office of Turkish President Recep Tayyip Erdogan was clearly evident on the stock market in the morning after the first round of elections. The prospect that Turkey’s longtime ruler would continue his unorthodox economic and fiscal policies for another five years sent the stock market crashing and sent the local currency, the lira, to new record lows in the days that followed. Before the election, Erdogan steadfastly defended his controversial course and denied responsibility for the horrendous inflation, but now he is apparently preparing a turnaround.
The name Mehmet Simsek stands for this return to a stability-oriented economic policy. Erdogan appointed the 56-year-old former banker as finance minister in his cabinet over the weekend. Simsek had held this post before, from 2009 to 2015. He then served as deputy prime minister for three years. In 2018, Erdogan replaced Simsek with his own son-in-law and became increasingly involved in monetary policy himself. The Turkish central bank effectively lost its independence. In addition, Erdogan also distributed election gifts that could hardly be financed in the long term, for example in the form of cheap loans for home ownership and pension increases. In addition, the government paid part of the energy bills for private individuals and companies.
Simsek clearly criticized Erdogan’s economic policy in the following years. While Erdogan supports the idea that central bank interest rate cuts lead to lower inflation, Simsek, in line with economic doctrine, assumes that interest rates must rise to fight inflation. The responsibility for inflation, which climbed to over 80 percent in Turkey last autumn, and for the decline of the lira lies with Erdogan’s policy, Simsek repeatedly explained.
Initial reports in recent weeks that Erdogan has met his ex-minister and critic and is planning to bring him into his new cabinet have met with skepticism. The president only needs a figurehead for the financial markets, his policy will hardly change, commented the financial news agency Bloomberg. The appointment of Simsek and other new cabinet members “should be viewed as mere window dressing,” wrote columnist Bobby Ghosh.
Return to rational basics
Simsek countered this suspicion that he was only supposed to make his reputation available to Erdogan while the previous economic policy was simply continued. He promised to ensure that the country returns to fiscal discipline and price stability. The basis for this is a “rule-based, reliable Turkish economy” and a “return to rational principles”. The new minister could not have reckoned more clearly with the previous course of his old boss.
However, the question is still open as to whether Erdogan will let his new chief financial officer do as he pleases. The President himself has not commented on a possible change of course. A return to what Simsek calls “rational foundations” comes at a high political cost. If the central bank regains its independence, increases interest rates and the government consolidates the budget, this would support the lira and curb inflation. Economic growth, which Erdogan had fueled with low interest rates, would suffer, however, and unemployment would likely increase.
Erdogan knew exactly what he was getting himself into with the appointment of Simsek. He is unlikely to have been surprised by his announcements. According to reports, both have met several times in the past few weeks for detailed discussions. It is said that Simsek was assured the necessary freedom of action for a financial and economic policy according to his ideas.
If Erdogan intended to use a well-known expert as a mere figurehead to calm the financial market, that has already failed. Market participants are not satisfied with the appointment of Simsek. On the first day of trading after the new cabinet was presented, the lira fell to a new record low. This trend is only likely to be reversed when Erdogan and his new government initiate the necessary change of course.