Q? Is Simsek here to stay?
Answer – Yes, and knowing what the hidden question herein is, I don’t think this is going to be a repeat of the Agbal situation.
The market does fear another economic policy 180, for sure, in a repeat of what happened to former CBRT governor Agbal. But I think things are different this time.
What is not different are Erdogan’s views on interest rates. He still views them thru an Islamic faith based prism. He deplores usury. And low interest rates have politically served him well – delivering growth and securing him many an election.
I think though Erdogan’s views have been tamed somewhat by a combination of factors:
First, I think there has been a near complete clear out of Erdogan’s economic policy advisers, partly reflecting the rise of the Teknocrats within the family/team. Erdogan trusts this cadre as they helped him deliver a very difficult election in 2023, and have brought him big geopolitical wins, for example in NK. They are rational and orthodox and have supported the promotion of the technocrats like Simsek, Erkan, Akcay, Karahan H&E to the key economic policy portfolios.
Agbal never had this level of backing from within the palace.
Second, the shear scale of the problems that faced Turkey, in the aftermath of the 2023 elections, and because of the past decade of unorthodox policies was such that there simply was no alternative but to move back onto an orthodox economic policy tack. If policy had not changed in the aftermath of the May 2023 elections, Turkey would have faced a systemic economic crisis to rival that in 2001/2. I think that was crystal clear to all rational economic thinkers, and the message I think was overwhelmingly related to Erdogan. He listened, understood and accepted the need for change.
Third, the policy is working, as reflected in the stabilisation of Turkish markets now, with Turkish credit risk moderating (CDS tighter by 400bps from the 2023 peaks), the lira relatively stable (or at least depreciating at a more modest pace), while the CBRT has been able to accumulate close to $40 billion in additional FX reserves.
Fourth, Erdogan has gone to the Gulf for money, for a financial bailout, and I think Gulf states, be that Qatar, UAE or Saudi Arabia have sent the same message – yes, we are willing to provide tens of billions in investment to Turkey, but we want our money paid back with a return, and to ensure that we demand orthodox economic policies.
Interestingly, I was asked last week whether Gulf money could be a substitute for Western capital flows and in a way could be a moral hazard play of allowing Erdogan to go off the rails and revert back to orthodoxy. My answer for the above reasons is absolutely not. And, interestingly Gulf money as yet has been slow to be disbursed to Turkey – the capital flows that are coming are from international capital markets. The Gulf guys seem to be using conditionality – demanding orthodox policy – as the price for their investment. I think this actually plays to the advantage of Simsek et al, as they can go back to Erdogan and explain that the Gulf money will only come if Simsek is allowed to deliver policy orthodoxy.
Q? What is your economic outlook for Turkey now?
Answer – there is now light at the end of the tunnel, even though I think the fight against inflation will be tough, and take time.
But a year ago, without the policy 180 to orthodoxy we have seen, I did expect a systemic economic crisis in Turkey – BOP, banking and sovereign debt. That was the approaching train, which I think has been put in the sidings, hopefully permanently.
Inflation is though entrenched. Expectations are for it to continue rising through to May/June this year, but then with base effects it should begin to moderate to perhaps 35-40% at end of 2024, and possibly to something with a 20% handle the year after. The CBRT policy tightening of over 3000bps now will have an affect, as will tighter fiscal policy. On the latter note that while the expectation for 2023 had been because of elections and earthquake spending the budget deficit would have been 9% of GDP, but as was it was nearer to 5-6%. That was a remarkable achievement, under the circumstances. But given pre local election spending, and the above expectations minimum wage hike this year to 49%, the CBRT’s job has been made harder.
I expect policy rates will have to be increased further now, to 45-50%, and held higher for longer, if the 5% inflation target is to be hit anytime soon. I think Simsek, Erkan et al are committed therein. I expect policy to be tightened after local elections – albeit admit therein some nervousness about talk of a potential constitutional referendum which would create another election cycle.
Q? What about local elections?
Answer – hard call but given opposition disarray still, I think the ruling AKP-MHP coalition looks set to do well, winning back a host of municipalities, perhaps even Istanbul – albeit Yavas’s hold on Ankara looks too tight. A strong showing by the ruling AKP-MHP should then play well for the maintenance of policy orthodoxy by Simsek et al – albeit as noted above, constitutional referendum not willing.
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