Economic reformer Babacan missing from Turkish cabinet

Economic reformer Babacan missing from Turkish cabinet
By Kivanc Dundar in Istanbul November 24, 2015

Prime Minister Ahmet Davutoglu unveiled the new Justice and Development Party (AKP) cabinet on November 25, pledging to carry out the kind of long-delayed economic reforms that will restore investor confidence and put the $800bn economy on a more sustainable growth path.

The new cabinet is a mixed bag. It includes former finance minister Mehmet Simsek, who is well respected by international investors, but not the former deputy premier and economy tsar Ali Babacan. Investors had wanted to see Babacan, a keen supporter of fiscal discipline, central bank independence and structural reforms, in the new government. Simsek has been appointed as the deputy PM in charge of economy, the post Babacan had previously held.

Erdogan loyalists such as the president’s son-in-law Berat Albayrak, Binali Yildirim, Mustafa Elitas and Naci Agbal have also made it to the cabinet. Albayrak has become the minister of energy and Yildirim has been appointed as the minister of transport, two important portfolios in the government. Davutoglu named Agbal and Elitas as the finance and economy ministers respectively.

“I still think the AKP is very committed to sound public finances, and keeping a low tax environment”, said Tim Ash from Nomura International in an email comment on November 24. “Simsek is the key anchorman now for economic reform - let's see if he has the political capital to drive these forward, likely supported by the economic reform-minded Davutoglu perhaps still against the interventionist instincts of Erdogan”.

The first reaction from the markets was mixed as investors tried to make sense of the new cabinet. The lira lost value against the dollar immediately after Davutoglu unveiled his government. It traded above 2.88 per dollar on Davutoglu’s announcement, but it later eased to 2.8660, signalling investors’ confidence in Simsek. Stocks that had been hit earlier in the day by the news that Turkey shot down a Russian plane on the Syrian border, rose on the news that Simsek will steer the economy.

It is likely that investors will wait for some time to see if the new government effectively delivers the reforms it has promised and they will also watch for signs that politicians will exert pressure on the central bank to cut interest rates to boost economic growth.

“I also wonder if with Babacan's exclusion also means the end for his close ally, central bank governor Erdem Basci when his term comes up in April. He now seems unlikely to be given another term”, said Ash.

It has been a turbulent day for the Turkish markets. The downing of a Russian fighter jet by Turkish F-16 planes on the Syrian border took its toll on investor confidence. After a brief recovery, the lira once again depreciated against the dollar after the Russian President Vladimir Putin warned Turkey of significant consequences. The lira fell 0.97%, trading at 2.8765 per dollar at 15:20 local time. Stocks were down 3.06%.

As far as the other appointments are concerned; Volkan Bozkır has remained as the minister for European Union affairs. Mevlut Cavusoolu has returned to the cabinet as the foreign minister, replacing Feridun Sinirlioglu, who served as the foreign minister during the interim government.

President Tayyip Erdogan on November 17 gave Davutoglu the mandate to form a new government after a snap election on November 1 enabled the ruling AKP to win back the majority in parliament it lost in the June election. The delay in the unveiling of the cabinet led to speculation that there was a disagreement between the premier and the president over a list of cabinet ministers.

An intensification of intervention in the independence of Turkish institutions, including the central bank, could also lead to more sluggish growth, and lower ratings, warned S&P on November 6 when it affirmed its unsolicited 'BB+/B' foreign currency long- and short-term sovereign credit ratings and 'BBB-/A-3' local currency long- and short-term sovereign credit ratings on Turkey. The outlook remained negative.

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