Turkey's deputy premier Mehmet Simsek may have survived the latest cabinet reshuffle but the ex-investment banker now looks less powerful than before as his economic portfolio has shrunk.
Simsek will continue to oversee the central bank and the treasury but responsibility for the Banking Regulation and Supervision Agency (BDDK) and the Savings Deposit Insurance Fund (TMSF) have been handed over to Deputy Prime Minister Nurettin Canikli, a close ally of President Recep Tayyip Erdogan. Moreover, Nihat Zeybekci, who has returned to the government as economy minister, will oversee Eximbank, which was supervised by Simsek before.
“Simsek, who is a trusted technocrat, was likely kept in the cabinet as a showcase figure and is likely to have minimal influence on the general direction of economic and business policy going forward,” Ege Seckin, an analyst at IHS in London, told bneIntelliNews. “Most importantly, the much-needed economic reforms are now a diminished possibility.”
Turkey’s new Prime Minister Binali Yildirim, a 100% Erdogan loyalist, has already declared that his government’s priority would be constitutional amendments that would give more executive powers to Erdogan, who favours a consumption-led growth model. One of the main pillars of Erdogan’s past electoral victories has been strong economic growth and he is likely to exert more pressure on the central bank to cut interest rates to boost the economy, creating a feel good factor as he pushes for constitutional reforms.
GDP growth will probably slow this year and remain below the government’s target of 4.5%. Exports have been weak and are less supportive of growth, leaving domestic demand as the main driver of economic activity. The government has increased the minimum wage by 30% but Erdogan thinks further measures are needed to encourage investment and spending. Households’ final consumption accounted for nearly 70% of GDP.
“The central bank has already shown signs of capitulation to political pressure, given the consecutive rate drops in the two recent Monetary Policy Committee meetings”, according to Seckin.
The possible aggressive rate cuts to be delivered by the central bank in the period ahead may have serious consequences. This will raise uncomfortable questions about the independence of the central bank.
The lira debt could come under pressure, which may affect roll overs of Turkish companies' debt. Private sector’s long-term loans received from abroad increased to $203bn at end-Q1 from $196bn at the end of 2015, according to the latest data of the central bank. Private sector’s short-term external debt, however, declined to $19bn at the end of March from $20.6bn at end-2015.
This leaves Turkey vulnerable to a sudden shift in global investment sentiment and capital flows in and out of emerging markets, especially when the US Fed is now signalling further rate increases.
The other concern is inflation. It is declining but remains above the government target of 5%. In case of a sustained depreciation of the lira it would be very difficult for the central bank to control inflation.
Maybe investors cheered on the reappointment of Simsek too soon; more time is needed to see if the new government would act more responsibly or whether it will would resort to all sorts of populism just to make sure that Erdogan’s presidential dreams come true.