The hype machine was not slow to spring into action in response to Recep Tayyip Erdogan’s June 9 appointment of Hafize Gaye Erkan, an ex-Goldman Sachs banker who will be the first woman to head Turkey’s central bank.
The Turkish media have been gushing over the 44-year-old Turkish American. “Brilliant Turk” (CNN Turk) and “the genius” (Hurriyet) were two of the more unrestrained responses, though economist Selva Demiralp took a far more measured line, pointing to Erkan’s half-year stint as co-CEO at failed Californian lender First Republic in an article for BBC Turkce. "Some unfounded praise for her in the Turkish press suggests that they aim to hide her experience of failure at First Republic," said Demiralp.
Whatever the opinion on Erkan’s credentials, the evidence appears to be mounting that it has dawned on President Erdogan that he juiced up Turkey’s feeble and feverish economy to such a huge extent in order to win re-election in May that a refusal to now give the global markets the orthodox economics that they want in return for investment could send the country off a cliff.
“Turkey,” pointed out analyst Brad W. Setser in his article on Turkey’s balance sheet published this week by bne IntelliNews, “is on the edge of truly running out of usable foreign exchange reserves—and facing a choice between selling its gold, an avoidable default, or swallowing the bitter pill of a complete policy reversal and possibly an IMF program.”
As well as Erkan, Erdogan has brought back former Merrill Lynch economist, bond strategist and market favourite Mehmet Simsek—who has spent the past week blowing strategic kisses at portfolio investors—to serve as treasury and finance minister and has appointed Cevdet Yilmaz, seen as a supporter of orthodox economic policies, as vice-president.
So provided Erdogan’s pivot to a conventional monetary policy is for real, does Erkan have what it takes to play her role in rescuing Turkey’s stricken economy?
Erkan, the strongman’s fifth central banker in four years, is a risk management expert who holds a PhD in financial engineering and operations research from Princeton University. At Goldman, she led financial institution group analytics, developing investment algorithms, before moving to First Republic, where she spent nearly eight years until December 2021. She is also a graduate of Harvard Business School's Advanced Management Program and of Bogazici University in Istanbul, where she studied industrial engineering.
Crain's New York Business magazine named her on its list of "40 under 40" rising business stars in 2018.
"Gaye is a financial whiz with a deep sense of social responsibility, reflecting her immigrant experience and lessons learned from the banking industry's role in the 2008 financial crisis," Kathryn Wylde, CEO of the nonprofit Partnership for New York City, was cited as saying in Crain's.
Seen as "tough, smart, and effective", Erkan has previously "expressed a deep interest in public policy and the welfare of the community, so it is no surprise that she would consider public service," Wylde said in comments reported by Reuters.
Given that Erkan has no formal central banking experience and Erdogan touts himself as an “economist” —who, despite all the empirical evidence and mainstream theory, will yet prove to the world that lowering interest rates pulls down inflation—conversations on monetary policy between the president and his new appointee could be intriguing. Erkan is no doubt fully aware that Erdogan has since 2018 fired three central bank chiefs in sackings that came after they raised rates.
Erkan’s broader views on policy are little known, but last year she started occasionally writing for Turkish daily Dunya and, in March, noted Bloomberg, she argued that the Federal Reserve’s monetary tightening heightened the risk of a recession in the US by the end of the year and pondered the alternative presented by Japan’s low rates policy.
As central bank governor, Sahap Kavcioglu (left) became known for backing 'Erdoganomics' all the way. His brief is now to supervise the banks.
One fly in the ointment for both Erkan and Simsek could be that Erkan’s predecessor, Sahap Kavcioglu, who toed the line on Erdogan’s unorthodox economics and has been criticised for spouting "gobbledegook" on inflation-fighting theory by analysts, has been named as head of the Banking Regulation and Supervision Agency (BRSA, or BDDK), according to the Official Gazette. Erdogan may expect him to keep the sticks to the bankers’ backs.
Timothy Ash, senior emerging markets sovereign strategist at BlueBay Asset Management, tweeted that “markets will be doubly pleased” by Erkan’s appointment as central bank chief and that Erkan and Simsek will make a “top notch team”, adding: “Guess Erdogan saw some use in keeping Kavcioglu in the wings.”
“Appointment of Kavcioglu at BRSA has complicated things for Simsek,” Ash said in a later tweet, adding that markets would focus on whether the Simsek-Erkan partnership could deliver policy tightening sufficient to save the freefalling lira.
Erik Meyersson, chief emerging markets strategist at Swedish bank SEB, was quoted by the Financial Times as saying that the retention of Kavcioglu in a new role meant Erdogan’s economic policies “could return at any time”.
Turkey’s next rate-setting meeting is scheduled for June 22.
JPMorgan Chase & Co and Barclays have said they expect the base rate to be increased by 16.5 pp to 25% at the rates meeting.
Goldman Sachs said in a June 9 note to clients that a "fully orthodox policy-maker" would allow the exchange rate to adjust upfront and push up the repo rate to a level where it anchored interest rates in the economy.
"In our view, this suggests that an orthodox policy-maker would raise rates to 40%, the current level of deposit rates," Goldman analyst Clemens Grafe wrote.