"Cosmetic" Turkish cabinet reshuffle signals no major policy shifts

Turkey's prime minister, Binali Yildirim, has not caused much of a stir with his reshuffle, but the markets are likely to be content that the economic management team was retained.
By bne IntelliNews July 20, 2017

Turkish PM Binali Yildirim opted for a limited cabinet reshuffle on July 19 which some commentators described as merely “cosmetic”.

The fact that the foreign and interior ministers stayed in their posts suggests that there won’t be any major changes in the government’s foreign and security policies in the foreseeable future.

Deputy PM Mehmet Simsek, who is largely trusted by investors, also retained his post, but Deputy PM Nurettin Canikli, who has long criticised high interest rates, was switched to defence minister, replacing Fikri Isik.

Keeping Simsek in the cabinet is a move aimed at not upsetting the markets, political commentator Murat Yetkin wrote in a July 20 article for Hurriyet Daily News.

Naci Agbal stays on as finance minister while another key minister, Economy Minister Nihat Zeybekci, also remains in his post.

The PM’s decision to keep the economic management team in place demonstrates that the government is to focus more on the economy, according Abdulkadir Selvi, a columnist for Hurriyet newspaper.

The Turkish economy grew 5% y/y in Q1, picking up from the 3.5% rebound seen in the previous quarter after the 1.3% slump experienced in the third quarter of 2016. But some analysts are sceptical that the growth trajectory has legs.

Following the cabinet reshuffle, pressure on the government to carry out long-delayed reforms will only increase.

“Expansionary fiscal policy and strong loan growth driven by the Credit Guarantee Fund have accelerated economic activity. We expect these two engines to remain mostly unchanged in the next two years,” Morgan Stanley analysts wrote in a report, published on July 20, following a trip to Turkey where they met with politicians, political analysts, journalists, local banks, embassies, the central bank and the sovereign wealth fund.

The central government budget deficit rose 74% y/y to TRY13.7bn (€3.38bn) in June from TRY7.92bn a year ago, finance ministry data showed on July 17.

“We see a strong correlation between the non-oil current account deficit (CAD) and non-retail loan growth, and this could exert some upside pressure on the CAD with a lag,” Morgan Stanley analysts also argued in their report. “If we start to see a deterioration in the inflation outlook driven by demand-pull factors in addition to cost-push, bringing down CPI to single-digits may take much longer than expected,” they added. Therefore, monetary policy should remain tight for longer than expected, they concluded.

According to the investment bank, support for the Turkish lira will continue to come from central bank policy over the next few months, but with ongoing concerns over the quality of growth, politics and external balance sheet risks, carry remains the main source of returns. “Turkey will likely remain vulnerable to bouts of volatility generated by Fed/ECB policy, and we stick to our 3.6 year-end USD/TRY forecast.”

The lira was down 0.8%, trading at 3.5294 per dollar as of 10:30am local time on July 20.

Morgan Stanley analysts noted that the majority of the people they met during their trip thought that the next presidential/parliamentary and municipal elections will be held some time in 2019.

"Blood change"

“This is a blood change. Such reshuffles take place when a change is needed,” Yildirim told reporters in Ankara, commenting on the reshuffle.

The PM announced the reshuffle after an unscheduled meeting with President Recep Tayyip Erdogan who regained the leadership of the ruling AKP party following a narrow win in the April 16 referendum on introducing a powerful executive presidency that constitutionally allows him to head a political party while head of state. Erdogan, of course, can continue to rule the country by decree under the ongoing state of emergency.

In the changes, Yildirim also appointed Justice Minister Bekir Bozdag as a deputy PM. Bozdag is expected to be the spokesperson for the government, state-run broadcaster TRT World reported.

He was replaced by AKP legislator Abdulhamit Gül who was one of the architects of the constitutional amendments which were put to a vote in the referendum.

“But Bozdag is not removed entirely from the cabinet; he is promoted to be one of the deputy prime ministers. Abdulhamit Gül…is likely to follow the same line dictated by Erdogan,” Yetkin argued.

Last week, Erdogan vowed to continue the massive crackdown on anyone suspected of being involved in the plotting behind last year's failed coup or in the attempted putsch itself.

In the purges that have followed the coup attempt that took place just over a year ago, about 50,000 people have been arrested and nearly 120,000 have been dismissed from state posts, while 965 companies with assets of around TRY 41bn ($11.3bn) have been seized.

On July 17, parliament extended the emergency rule that was declared in the wake of the botched attempt at overthrowing Erdogan and the government by another three months.

Shifting Canikli from his post as deputy prime minister to the defence ministry could be related to approaching Supreme Military Council meetings where another cleansing of the armed forces of Gulenist suspects is anticipated, according to Yetkin.

“Calling the cabinet reshuffle radical or an important one in regard to the decision-making mechanisms is not easy as it is rather a cosmetic one, as if it was done just for the sake of it,” he concluded.

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