CONFERENCE CALL: Turkish market will be a “write off” in 2016 if central bank independence ignored

CONFERENCE CALL: Turkish market will be a “write off” in 2016 if central bank independence ignored
By Henry Kirby November 27, 2015

Investors can “write off 2016” if the independence of Turkey’s central bank isn’t taken seriously by President Erdogan’s new government, according to Michael Harris, head of research and a Turkey strategist at Renaissance Capital.

Speaking only hours after Turkey shot down a Russian SU-24 fighter jet in Syria, Harris joined an expert panel at London’s Citadines Hotel on November 24 to discuss the political and economic future of Southeast Europe’s biggest economy in bne IntelliNews’ latest debate, “Turkey: Which Way Now?”

“There are two key issues here: the 30% minimum wage increase and the central bank,” Harris said. "If both of those are addressed in a market-friendly way over the course of this next month, then we’ve got some life in this market in 2016.”

Autonomy of institutions was a hot issue throughout the debate, with the freedom of the Central Bank of the Republic of Turkey (CBRT) a particularly pivotal factor in both the efficacy of and investor faith in the new government, according to panelists.

Harris described the CBRT as “technically independent”, but “not behaving in an independent way”. Compared to countries with long lists of necessary reforms, like Brazil, South Africa and Russia, Harris said: “All that needs to be done in Turkey is to guarantee the independence of the CBRT.”

The omission of Ali Babacan from the new Turkish cabinet, also announced on the day of the event, was a key point of discussion, with most of the panel agreeing that the absence of the former deputy prime minister responsible for the economy did not bode well for investors expecting meaningful reforms.

To many, Babacan represented the much-needed reformist and technocratic approach to economic governance that Turkey needs. Replacing him in the new cabinet is Mehmet Simek, the former finance minster who alongside Babacan was one of the figures whose presence in government calmed investor nerves.

Losing Babacan “was a bad PR decision”, said Harris. “Politically, they’re trying to marginalise a potential future competitor but, practically, the AKP [Turkey’s ruling party] brand among investors has been tarnished.”

Jean-Patrick Marquet, director for Turkey at the European Bank for Reconstruction and Development (EBRD), was more optimistic. “One of the key concerns in Turkey has been the unpredictability of policy making but, aside from the removal of Babacan, this cabinet actually shows a lot of continuity in key areas,” he said.

Marquet’s optimism was shared by Aytug Goksu, commercial counsellor at the Turkish Embassy in London. “Simsek is an orthodox economist and has credibility,” Goksu said. “That he is in the cabinet is very good news.” 

Suna Erdem, writer of bne IntelliNews’ “Beyond the Bosphorus” column, said that Simsek’s presence alone is not enough to guarantee the government will steer Turkey in the right direction, raising concern over just how much autonomy he will have to orchestrate the reform process. “Whether President Erdogan will allow Simsek to do what he wants, I do not know,” Erdem said.

Refugee issues

With very little verifiable information available at the time, the panel seemed reluctant to comment on the significance of the downing of the Russian jet, which Russian President Vladimir Putin described as “a stab in the back”. Rencap’s Harris did note that the fallout from the event “can be managed,” adding, “there’s no need for this to spin out of control”.

More was said about the ongoing refugee crisis and Turkey’s role in it. Erdem noted that Turkey has “coped admirably” with the 2mn refugees it currently has, but added that there are “big policy decisions that Turkey and EU need to make together”.

A resettlement policy, Erdem said, or an incentive to stay is key if the flow of refugees into the EU is to be stemmed. “Because of their legal status, they cannot get jobs in Turkey,” Erdem explained. “This is one of the main reasons they are leaving Turkey.”

Aytug Goksu said, “some social issues are developing” with regards to the refugee crisis. For example, he said, “there are now more refugees in the southeastern city of Kilis than there are Turkish residents.”

Goksu was quick to note the potential for Turkey to benefit from their role in the crisis, though. “The EU [accession] process has not really been working in Turkey since 2006, but the Syria crisis has brought Turkey and the EU together again,” he said.

Marquet agreed, saying that Turkey’s effort with Syrian refugees “cannot be ignored” by the EU, adding that “things are now moving in the right direction” in terms of Turkey’s candidacy. He noted, though, that the Transatlantic Trade and Investment Partnership (TTIP) agreement between the EU and US was likely on Turkey’s radar as a bi-product of EU accession-focused reform.

Harris was more explicit in his acknowledgment of this possibility. “I don’t think Turkey joining the EU is something this government ever thought was likely,” he said. But “Turkey, geopolitically, wants to be involved in the EU-US trade agreement, and is using the cover of the EU process to push through difficult reforms which could result in agricultural free trade.” One fifth of Turks work in the agricultural sector and the country’s wheat and meat is some of the most expensive in the world.

Erdem agreed, saying that, “the carrot of joining is good for all the reasons that countries like the UK think it’s a negative thing, such as loss of sovereignty and all the membership rules. A lot of the good things that have happened in Turkey, like reforms, have happened because there is hope of EU membership.”