Question mark over Turkish deputy PM Simsek's future if Erdogan drives for growth

Question mark over Turkish deputy PM Simsek's future if Erdogan drives for growth
Turkish Deputy PM Simsek has never openly clashed with Erdogan over the latter's unorthodox economic views.
By bne IntelliNews May 25, 2017

President Recep Tayyip Erdogan may be set to shift Turkey’s economic management focus from fiscal discipline to growth, Abdulkadir Selvi, a well-informed columnist close to the ruling AKP, wrote on May 25 in an article for Hurriyet.

The key question for investors is whether the move might involve a cabinet reshuffle that Deputy PM Mehmet Simsek - a former Merrill Lynch economist praised for formulating fiscal policy which helped Turkey to recover strongly from the 2008 financial crisis - may not survive. However, Simsek, who defends more orthodox policies and has promised to carry out long-delayed structural economic reforms, has never openly clashed with Erdogan, known for his unconventional views on interest rates and inflation.

There has been talk of a cabinet reshuffle in political circles in Ankara since Erdogan resumed leadership of the AKP at an extraordinary party congress held on May 21. But in previous remarks, Erdogan denied any shake-up was ahead. Still, many observers think a major cabinet overhaul is all but inevitable under Erdogan, who on April 16 successfully negotiated a referendum to obtain the right to create an executive presidency with sweeping powers.

If Simsek survives the anticipated cabinet reshuffle, it also remains to be seen whether he will have enough power to push his reform agenda in a government filled with Erdogan loyalists.

Since the failed coup attempt last year, Erdogan has been calling for policies to boost economic growth, such as more bank lending at cheaper rates, even though strong domestic demand supported by loans will carry with it the risks of higher inflation and a higher current account deficit. What’s more, if the government opts to boost growth by directing more state spending into infrastructure projects, Turkey could experience higher budget deficits. International investors will keep a close eye on indications that such policies are ahead.

Erdogan, who has not lost a single contest at the ballot box since 2002, owes much of his electoral success to the unprecedented economic growth, averaging 5.9% between 2003 and 2015, which Turkey enjoyed. But GDP growth slowed to 2.6% in 2016, partly reflecting the adverse impacts of the failed coup attempt last July.

Erdogan has set the bar higher for the next general election, according to columnist Selvi. “He is working on a road map that will lay out a blueprint for economic and social policies that he hopes can help the AKP secure at least 50% of the vote in the 2019 poll,” Selvi said. “His priority will be economic growth,” he added.

If there is a reshuffled cabinet it seems certain to focus on mega infrastructure projects and support for small and medium-sized companies, according to Selvi.

As part of his master plan, Erdogan will announce major investments in the energy, construction, health, tourism, and defence sectors, Hurriyet reported on May 24. Investments will be ploughed into nuclear energy, urban transformation and building more roads and bridges, according to the newspaper.

Everything at this point, of course, is only speculation and that will be the case until Erdogan unveils his true strategy. However, the reports suggest Erdogan’s immediate priority is the welfare of AKP supporters and keeping his supporter base intact with the provision of economic benefits until the next election. Not that measures aimed at restoring international investors’ confidence in the Turkish economy are not on the table. At the end of the day, Erdogan knows full well that the Turkish economy needs foreign capital flows from FDI and portfolio investments that eventually help spur domestic demand.