It’s fair I think to ask why it is different this time with Simsek, and why I don’t think that he will suffer the same fate as Naci Agbal, in being fired from office just months after taking office and having instigated rate hikes.
First, I don’t think the move against Naci Agbal was just about his move hiking policy rates. Rather, I think he may have touched nerve points around the issue of FX intervention and why at the time leading up to his appointment the CBRT had wasted as much as $128bn in a failed defence of the lira.
Second, I think the current Simsek situation is quite different to that which faced Agbal. In particular, back in late 2020, when Agbal was appointed he was pretty isolated and was not really given full scope to hire a team. His political backing, or cover, was limited. Perhaps at the time there was not a full understanding of the scale of the challenge facing the CBRT, and Agbal was a stop gap, aimed to buy time.
This time around I think there is real understanding in the corridors of the presidential palace that Turkey faces a systemic crisis, after the election if the unorthodox policy mix was carried on with. I don’t think that sense of real crisis was there in 2020-21, yet. And given the scale of the economic challenges now faced I think Simsek has won a much stronger mandate, and that has been seen in the hires he has been able to make, including Hafize Gaye Erkan at the central bank, and more recently three really impressive, competent deputy governors, from the orthodox school of thinking. This time around if Erdogan wants to fire Simsek, he would have to roll out a much more far reaching clearout than occurred with Agbal in March 2021. I think if Erdogan now tried such a clearout it would certainly set in motion the systemic crisis that he hired Simsek to avoid. It would make that crisis inevitable. And would Erdogan want to fight local elections with the Turkish economy facing systemic crisis, with the currency and banks collapsing, and the country likely at the brink of default. I don’t think so.
Third, and related to both points above, I think we are seeing political change in Turkey post election, with the focus of Erdogan moving onto the succession, and a revamp/refresh of the cabinet and the economic policy team to reflect the best succession option for the Erdogan family. And at this point it is appearing as the Bayraktar line, which are rational, logical, meritocratic and have delivered in the technology sphere for Turkey and Erdogan in the last election. Not saying they delivered the victory completely because there Erdogan’s supreme political acumen – his great campaigning ability, his ability to read the mood of enough of the nation to win an election, and to constantly run rings around the opposition, was critical. But, a big theme in the election was Turkey’s increasingly technological prowess, with drones, an unmanned fighter jet, a first helicopter carrier, a new electric car, et al. And the Bayraktar brand were central to all that – look at Technofest. Technology won votes in the election, and the Bayraktar name is a winning brand there. And, if Erdogan does decide not to run in the next national vote, the likely next best candidate with the best chance of winning is Selcuk Bayraktar who is married to Erdogan’s daughter, Sumeyye.
And I think what we saw with the appointment of Simsek, Erkan et al is some delegation in the economy sphere by Erdogan to a younger generation whom he trusts, and have proven themselves to be technically competent. This younger crew around the Bayraktars are rational in economic outlook, and are affecting a positive change in terms of a change in economic policy settings. So unlike Agbal, who was politically isolated, I think Simsek, Erkan, et al have critical political backing from within the family. I would say this is still not cast iron, and there are still some of the less orthodox advisers around Erdogan – worrying a bit that Kavcioglu was moved from the CBRT to the BRSA. But there is now hope.
I think in recent weeks we have seen in their policy actions and their interaction with the market, investors and Gulf backers, that Simsek, Erkan, et al are extremely competent, have a plan to exit Turkey from a potential systemic crisis, and there is now light at the end of the tunnel.
Fourth, the plan noted above can work but it needs financing. Failing resort to the IMF, which Erdogan is loathed to do, the only source of financing in sufficient scale, is the Gulf. And as we have seen only a few weeks ago with the $51bn UAE deal for Turkey, the rich Gulf states are willing to back Turkey. But importantly, the sea change in Gulf bailouts for economically distressed states from Bahrain to Pakistan, Tunisia and now Turkey, is that Gulf states will provide financing, but they want it back, as it’s an investment which they want returned with interest. And the Gulf policy makers are not stupid, they understand that to ensure a good return on investment requires a solid macro backdrop which itself demands sound and orthodox policies.
So I imagine when Simsek, Erkan et al are touring the Gulf to request financial support, they have a pitch book which details and ticks the boxes in terms of prudent fiscal policy, orthodox monetary policy, a flexible and competitive exchange rate, structural reform and perhaps also improved trading relations with key partners – the latter which might explain the push to inject some life again into Turkey’s EU accession bid which at the least might see reward in terms of a new Customs Union agreement.
Simsek and Erkan are not operating in a political vacuum, and they understand the political reality that Erdogan is focused on winning local elections next March. They have constraints in terms of how far they think they can risk monetary policy tightening this side of local elections. But they are pitching that while the boss might baulk at moving to positive real rates anytime soon, they can achieve the same in terms of actual slowing of domestic demand vis fiscal and macro prudential policies, that they can get away with smaller hikes in headline rates. I would argue that more upfront policy rate hikes will likely mean less over the longer term. I think that’s the best way to turn inflationary expectations lower sooner.
But I guess in Erkan’s less ambitious end year inflation forecast of 58%, she accepted that less near term ambition in policy rate hikes has a price of higher inflation. But the message is that after local elections the heavy lifting will come in then reining in inflation. In the meantime, it’s about buoying confidence with an upbeat reform story, or the promise of one, and the hope of ratings upgrades to come it part of that.
Excerpt from Tim Ash blog, please visit the link to read the full article
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