The end of "Erdoğanomics"?

The President of Türkiye continues to surprise the world with drastic changes in his country's foreign policy and economy. Last week, he fired several more controversial financial advisers who epitomized his unorthodox monetary policy. The new head of the Central Bank appeared before the cameras for the first time with a detailed report on the situation in the Turkish economy and plans for its stabilization.

фото: liter.kz 

The appointment of the new, "technocratic" cabinet of Recep Tayyip Erdoğan and the pro-Western names in the economic bloc of the government caused cautious optimism. However, many experts still had doubts about how far the Turkish president would go in this "turn to the West." The main question is whether Erdoğan, known for his unwavering intentions to "fight the banking lobby" to the last dollar in the treasury, is ready to give up the manual management of the Central Bank and the experiments with lowering the discount rates and leave the country's economy in the hands of professionals.

The success of these steps and the correctness of personnel decisions will depend not only on the fate of the Turkish economy but also on the political future of Erdoğan himself and his Justice and Development Party, which has already begun to actively prepare for the extremely important local elections in 2024.

So what's behind the new appointments and what should we expect from the new faces in Erdoğan's government?

Return to the origins

The reform of the economic bloc began immediately after the presidential elections with the appointment of Mehmet Şimşek as Minister of Treasury and Finance. A British-Turkish citizen of Kurdish origin, he began his career in London as Chief Economist in charge of the Europe, Middle East and Africa region at Merrill Lynch (one of the world's leading investment banks). All this time he lived in Britain, New York, and European capitals and at the same time cooperated with the Turkish authorities, advising the first government of the Justice and Development Party. In the second Erdoğan government, in 2009, Şimşek was appointed to the position of finance minister for the first time. It was Şimşek who formulated the fiscal policies that helped Türkiye quickly recover from the global financial crisis of 2008, and later became the main architect of the Turkish "economic miracle" of the early 2010s. For almost 10 years (in the positions of the head of the Ministry of Finance and the deputy prime minister responsible for the economic bloc), he implemented far-reaching reforms, established the Tax Audit Council, simplified tax rules, expanded the rights of taxpayers, and significantly reduced the shadow economy. Today, his name is rightly called the “best music to the ears” of Western investors, and jokes about his "calming" effect on the stock markets.

Mehmet Şimşek

"Orthodox" financier from Manhattan

No less attractive is the figure of the new Chairman of the Central Bank - the first woman in this position, Hafize Gaye Erkan. A graduate of Princeton University and Harvard, she is an expert in risk management. After several years at Goldman Sachs (one of the largest investment companies not only in the United States but in the whole world, with headquarters in New York) and the jewelry giant Tiffany & Co., Hafize-khanim spent almost eight years at the American First Republic Bank. In July 2021, she was appointed one of the leading executive directors, and at the end of the same year, she resigned from the bank - even before the mass outflow of investors began.

Erkan is already the fifth head of the Central Bank of Türkiye since 2019. Before her, this position was held by the loyal Şahap Kavcıoğlu, who is ready to unquestioningly follow the instructions from "above" and systematically transfer the country to the rails of "Erdoğanomics". After his dismissal from the Central Bank, he was appointed as the head of the Banking Regulation and Supervision Board (BDDK), a body with significant powers in the field of control of credit flows, which raised many questions about the authorities' readiness for the fundamental changes in this area.

Hafize Gaye Erkan

Low start

Prior to the appointment of Kavcıoğlu, Erdoğan fired three central bank governors who had not demonstrated sufficient success in implementing his unorthodox monetary policy.

The last time the Central Bank of Türkiye raised the discount rate was in the spring of 2021, after which the president consistently "pushed" the Central Bank to lower rates, giving priority to growth, investment, and exports. Under the pressure of the authorities, the interest rate of the Turkish Central Bank was reduced from 19% to 8.5% in two years - contrary to all the laws of the economy and market expectations.

The reduction of rates against the background of rising inflation led to a currency crisis, which in turn only pushed the lira down, as a result of which inflation officially reached a 24-year high of 85.5% in the fall of 2022 (according to unofficial data, it exceeded 100%). The central bank's reserves were depleted, as a significant part of them (at least $23 billion, according to the Financial Times) was spent on stabilizing the lira exchange rate amid a surge in demand for the currency.

In this state, the economy was given to Şimşek’s new team, which the world half-jokingly called either "suicide bombers" or economic "special agents", eagerly awaiting their first decisions.

The worse the better?

Last week, the new head of the Central Bank, Hafize Gaye Erkan, was "baptized by fire", appearing for the first time in front of the cameras with a detailed report on the current inflation. She gave a convincing presentation based on real data, not political slogans, and answered every question herself, not avoiding unexpected and harsh criticism from journalists.

The Wall Street Journal cites the memories of Erkan's colleagues at First Republic Bank: "The data do not cause objections. Any position must be supported by the strength of numbers," she liked to repeat at weekly meetings. Her main mantras were "deposits, deposits, deposits" and "check, check, check," former colleagues say. It seems that Erkan is going to follow the same principle in Türkiye.

For the first time in a long time, the head of the Central Bank doubled the expectations regarding inflation indicators at the end of the year (to 58%) - and for the first time in a long time, the work of the Central Bank received the most favorable reviews from both Turkish business and international investors and financiers. For specialists, these painful steps are a sign of a "return to normality". A crisis that testifies to the correctness of the diagnosis and the imminent recovery of the economy.

It is interesting that even among ordinary citizens, who should be outraged by the "deterioration" of the economic situation, the mood is quite optimistic. For supporters of the current government, the president's word is the law, and any personnel appointments are a priori correct. For the opposition, these are long-awaited steps demanded long before the elections. In the case of Kemal Kilicdaroglu's election victory, any of the current names of government officials of the economic bloc could easily be imagined in the same positions in the "opposition" government.

Mission (im)possible: improve stock indices without collapsing political ratings

Şimşek’s new team supports the gradual increase in interest rates.

But it faces a difficult task: the Central Bank predicted inflation at the end of the year at the level of 58%, and the basic level of discount rates (already after the first decisions to increase them) is only 17.5%.

Sources close to the government say that one of Şimşek's conditions before accepting Erdoğan's numerous offers to lead the economy destroyed by his predecessors was complete independence of the Central Bank in decision-making and his own team.

Judging by the first steps, Erdoğan kept his promises.

However, important local elections are ahead, in which the ruling party plans to "take" key cities - Istanbul, Ankara, and Antalya - from the opposition. Therefore, we will have to fight inflation taking into account political realities. It seems that Şimşek will also be forced to fulfill his part of the agreement: it is said that the Minister of Finance promised Erdoğan not to raise interest rates above 25-30%.

At a recent presentation, Hafize Erkan confirmed that she would gradually raise rates and instead focus on fiscal and financial discipline by selectively cutting credit and borrowing, and tightening the market by reducing cash available to consumers.

According to her, only a "complex approach" can provide a way out of the crisis. This testifies not only to the systematic thinking of the new team but also to the destructive consequences of "erdoğanomics", which cannot be overcome by focusing on only one problem.

Personnel decides everything

Another piece of news that rocked Türkiye – unexpected for everyone. Erdoğan fired three more deputy governors of the central bank, known for their loyalty to the president and the mantra that "low-interest rates cause low inflation."

They were replaced by Cevdet Akçay, a well-known and experienced banker; Fatih Karahan, former advisor to the Federal Reserve System (of the US central banking system) and Amazon's chief economist; and Hatice Karahan, an adviser to Erdoğan who is a professor of economics and holds orthodox monetary views.

Cevdet Akçay

Hatice Karahan

The appointment of talented financiers and professional managers to the leadership positions of the Central Bank, rather than executives loyal to the authorities, means that Şimşek managed to bring his team with him. Many Turkish observers doubted that this would happen. However, Erdoğan demonstrated his readiness to "untie" Şimşek's hands - in exchange for an increased inflow of Western investments, financing of the country's needs, and fulfillment of pre-election promises to increase salaries and social benefits.

Fatih Karakhan and his family are returning from the USA to Türkiye

Pragmatism above all else

U-turns are nothing new in Türkiye's foreign policy or economy. Erdoğan is a pragmatic politician. He can change views, draw conclusions, and borrow ideas from others if they best suit his current tasks or help him win the next election.

And this is the main secret of his more than twenty-year stay in power.

Unlike the opposition, which has been dancing on the rake for years, Erdoğan knows how to learn from his mistakes.

Television helped win the 2023 presidential election, albeit in the second round and by a narrow margin.

In the 2024 local elections, this may not be enough.

So, it's time to stock the fridges.