Turkey’s new finance minister vows to return to ‘rational’ economic policy

Turkey’s new finance minister has vowed to return to “rational” policies after years in which President Recep Tayyip Erdoğan’s unorthodox tactics put the country’s $900bn economy under severe strain and sent the lira to a record low.

“Transparency, continuity, predictability and compliance with international norms will be our basic principles in achieving the goal of increasing social welfare,” Mehmet Shimsek said at a handover ceremony with his predecessor Nureddin Nebati on Sunday.

“Turkey has no choice but to return to a rational basis,” he said, adding, “We will give priority to macro-financial stability.”

Şimşek previously served as Deputy Prime Minister and Minister of Finance before leaving the government in 2018. Erdogan brought him back to the cabinet on Saturday as part of a shake-up that raised hopes that Turkey would turn away from unorthodox policies that have created a severe cost of living crisis and fleeing markets. sent to foreign investors.

“The choice of Mehmet Shimsek . . . increases the likelihood that monetary policy will move in a more conservative direction,” Goldman Sachs said in a note to clients on Saturday.

Simsek and other officials appointed to steer the economy face significant challenges in setting Turkey on a more sustainable path. Inflation is running above 40 percent and foreign exchange reserves have been severely depleted in an effort to prop up the lira and finance the massive current account deficit.

Despite efforts to stem the lira’s decline, the currency has fallen 67 percent against the dollar over the past three years.

“Reducing inflation to single digits in the medium term. , , And it is very important for our country to accelerate structural change that reduces the current account deficit,” Simsek said on Sunday.

Under the “lira-ization” policy adopted by Nebati, the government introduced a series of measures that gave businesses and consumers a strong incentive not to hold foreign currency. One of the most high-profile tools was the introduction of savings accounts in 2021 to protect depositors against depreciation in the lira at government expense.

About $125 billion is held in accounts and some economists worry that the weakening of the lira will increasingly strain government finances.

Other measures include managing businesses’ ability to buy foreign currencies, which some analysts have likened to capital controls.

Erdoğan’s government also sought to stimulate the economy ahead of the election, raise the minimum wage and public sector wages, and provide the equivalent of a month’s free petrol. Many economists warn that the measures have exacerbated inflationary pressures.

Investors and economists say whether Erdoğan, a longtime opponent of high borrowing costs, will allow interest rates to rise, it will be a test. Erdogan prompted the central bank to cut the rate from 19 percent two years ago to 8.5 percent currently, despite rising inflation.

The gap between the central bank’s policy rate and inflation has pushed “real” interest rates into negative territory – one of the reasons for the severe depreciation of the lira.

Investors are now waiting to see whether Erdoğan will reshuffle the leadership at the central bank. Incumbent Sahap Cavicioglu has overseen a series of sharp rate cuts at the behest of the president since taking office in March 2021.

Another issue is whether Erdogan will be prepared to stick to the program if the central bank implements the sharper rate hikes economists say are needed.

Goldman forecasts the lira will weaken sharply next year from slightly less than TL21 to TL28 to the dollar, regardless of SIMSEC’s handling of economic policy.

Simsek, a former senior Merrill Lynch bond strategist who is well-regarded by foreign investors, left his position as deputy prime minister in 2018 when the president appointed his son-in-law, Berat Albayrak, as finance minister.

Albayrac was blamed for spending tens of billions of dollars in foreign exchange reserves during his two years in the role in a failed attempt to remedy the currency crisis, while the central bank sharply reduced interest rates.

Economists worry that a similar situation could happen again if Erdogan loses patience with the economic adjustment program.

“Will any policy change involve greater central bank freedom and higher interest rates or will it be a half-hearted effort?” said Liam Peach at Capital Economics in London. “Presumably Simsek has demanded tighter monetary policy as part of his agreement, but it would still be a surprise to us if Erdogan gave up full control.”

Additional reporting by Fanja Guler

Turkey’s new finance minister has vowed to return to “rational” policies after years in which President Recep Tayyip Erdoğan’s unorthodox tactics put the country’s $900bn economy under severe strain and sent the lira to a record low.

“Transparency, continuity, predictability and compliance with international norms will be our basic principles in achieving the goal of increasing social welfare,” Mehmet Shimsek said at a handover ceremony with his predecessor Nureddin Nebati on Sunday.

“Turkey has no choice but to return to a rational basis,” he said, adding, “We will give priority to macro-financial stability.”

Şimşek previously served as Deputy Prime Minister and Minister of Finance before leaving the government in 2018. Erdogan brought him back to the cabinet on Saturday as part of a shake-up that raised hopes that Turkey would turn away from unorthodox policies that have created a severe cost of living crisis and fleeing markets. sent to foreign investors.

“The choice of Mehmet Shimsek . . . increases the likelihood that monetary policy will move in a more conservative direction,” Goldman Sachs said in a note to clients on Saturday.

Simsek and other officials appointed to steer the economy face significant challenges in setting Turkey on a more sustainable path. Inflation is running above 40 percent and foreign exchange reserves have been severely depleted in an effort to prop up the lira and finance the massive current account deficit.

Despite efforts to stem the lira’s decline, the currency has fallen 67 percent against the dollar over the past three years.

“Reducing inflation to single digits in the medium term. , , And it is very important for our country to accelerate structural change that reduces the current account deficit,” Simsek said on Sunday.

Under the “lira-ization” policy adopted by Nebati, the government introduced a series of measures that gave businesses and consumers a strong incentive not to hold foreign currency. One of the most high-profile tools was the introduction of savings accounts in 2021 to protect depositors against depreciation in the lira at government expense.

About $125 billion is held in accounts and some economists worry that the weakening of the lira will increasingly strain government finances.

Other measures include managing businesses’ ability to buy foreign currencies, which some analysts have likened to capital controls.

Erdoğan’s government also sought to stimulate the economy ahead of the election, raise the minimum wage and public sector wages, and provide the equivalent of a month’s free petrol. Many economists warn that the measures have exacerbated inflationary pressures.

Investors and economists say whether Erdoğan, a longtime opponent of high borrowing costs, will allow interest rates to rise, it will be a test. Erdogan prompted the central bank to cut the rate from 19 percent two years ago to 8.5 percent currently, despite rising inflation.

The gap between the central bank’s policy rate and inflation has pushed “real” interest rates into negative territory – one of the reasons for the severe depreciation of the lira.

Investors are now waiting to see whether Erdoğan will reshuffle the leadership at the central bank. Incumbent Sahap Cavicioglu has overseen a series of sharp rate cuts at the behest of the president since taking office in March 2021.

Another issue is whether Erdogan will be prepared to stick to the program if the central bank implements the sharper rate hikes economists say are needed.

Goldman forecasts the lira will weaken sharply next year from slightly less than TL21 to TL28 to the dollar, regardless of SIMSEC’s handling of economic policy.

Simsek, a former senior Merrill Lynch bond strategist who is well-regarded by foreign investors, left his position as deputy prime minister in 2018 when the president appointed his son-in-law, Berat Albayrak, as finance minister.

Albayrac was blamed for spending tens of billions of dollars in foreign exchange reserves during his two years in the role in a failed attempt to remedy the currency crisis, while the central bank sharply reduced interest rates.

Economists worry that a similar situation could happen again if Erdogan loses patience with the economic adjustment program.

“Will any policy change involve greater central bank freedom and higher interest rates or will it be a half-hearted effort?” said Liam Peach at Capital Economics in London. “Presumably Simsek has demanded tighter monetary policy as part of his agreement, but it would still be a surprise to us if Erdogan gave up full control.”

Additional reporting by Fanja Guler