Erkan clears out and cleans up the CBRT

I will take my lead from a U.S. investment bank report this morning on recent HR changes at the CBRT, when they described them as “massively positive”.

I, we, refer here to the publication in the official gazette late last night of a decree which saw Cevdet Akcay, Hatice Karahan and Fatih Karahan appointed to the board of the central bank, and the MPC. This follows the prior hire of the first women as central bank governor of Turkey, Hafize Gaye Erkan.

All three new board hires are respected, orthodox economists, all PhDs. Cevdet is a former chief economist from Yapi Kredi Bank, and a proper professor of economics. He is an energetic, outspoken out of the box but orthodox economic thinker. He is well known to the market and trusted. Hatice has a PhD from Colombia University, and worked as a former adviser to Erdogan, but was one of the rational, orthodox advisers and is again well known to the market and is trusted. Fatih Karahan has a PhD from University of Philadelphia as well but worked at the NY Fed specialising in labour and market studies but within the monetary research division, and worked also as a economist at Amazon prior to hire. Again an orthodox thinker with a great CV.

Can it get any better than this?

Perhaps as significant as those being hired into the CBRT are those leaving, including three deputy governors, amongst them Emrah Sener, known to be an architect of some of the more unorthodox monetary policies rolled out by the CBRT to align with the views of Erdogan.

How to read all this?

How can a known unorthodox adherent as Erdogan first hire an orthodox thinker, in Hafize Gaye Erkan, as governor of the CBRT and then back her with the appointment of a similarly unorthodox team around her?

Well my read is this is a massive vote of support for Simsek, and Erkan, and I think recognition in the presidential administration, and his now closest advisers in the family, that needs must and the prior economic policies had taken Turkey to the brink of a systemic economic crisis. There had to be a policy reversal, Erdogan was convinced of this by his new crew of advisers around him to change, and we are seeing the roll out, albeit initially gradually, of more orthodox policies.

I do think here this is bigger, it is about the succession and Erdogan thinking about eventually passing the baton to others, likely in the family, to take on the political challenge. This will likely increasingly be seen after the local elections next March when we see yet more delegation. But I think the fact that Erdogan is now trusting the likes of the Bayraktars, known to be technocratic and meritocratic, and demonstrating this with the hires to the MOF around Simsek and the CBRT, is evidence of this. It is an acknowledgement that the new group of advisers around Erdogan, who are technocratic, and more orthodox in view, are perhaps finally telling truth to power, and might actually be right.

Putting all this together - some policy adjustment to address the BOP crisis, with 900bps in rate hikes, and a major tightening in fiscal policy, new big money commitments to Turkey from the UAE ($51bn and likely more to come from the rest of the Gulf), and the hiring now of a mega impressive orthodox policy team at the MOF, the CBRT and elsewhere, plus a reach back out to the West around EU accession (Customs Union at least) and the US and NATO (Swedish NATO memership agreed) is positive and suggests that there is now a path out of economic crisis for Turkey. It is still a big challenge, and it can still derail if there are policy mistakes, but there is finally some light at the end of the tunnel, and the fact that local elections are still a focus means this the tunnel is long, and extending beyond March 2024 at the minimum, after which is think we see a step up in more aggressive monetary adjustment to rebalance the external accounts and rein in inflation.

Now I know many will say the key risk here is a repeat of the policy reversal which came with the sacking of Naci Agbal as governor after only a few months on the job. I think this is different this time around as Simsek, Erkan et al have such strong backing from key elements within the “family” and who appear likely to be part of Erdogan’s succession thinking. Firing Simsek et al would surely risk destabilising that very succession process which I think is increasingly in Erdogan’s mind after a very difficult and hard fought election.

Another reason suggestive Erdogan cannot easily reverse the move to more orthodox policies is that with a current account deficit of around 5% of GDP and gross external financing needs of well over $200bn, and with only around $60bn in usable FX reserves, Turkey needs foreign financing. The only ready source of such funds is the Gulf but as we have seen with recent Gulf support for Bahrain, Egypt and Pakistan, the price of such support is economic policy orthodoxy. This means a flexible and competitive exchange rate and orthodox monetary and fiscal demand management.