In Simsek we trust

Erdogan was finally confirmed in office at his inauguration on Saturday. Soonafter he unveiled his new cabinet which came as a pleasant surprise, appearing moderate and reformist in orentiation.

First, Erdogan replaced the firebrand former minister of interior, Soylu, with a more moderate politician.

Second, Cedvet Yilmaz, a generally respected former planning minister, was appointed vice president, presumably with some oversight over economic policy.

Third, Mehmet Simsek returned to his role as minister of finance and treasury, roles he previously held for close to nine years.

Simsek is a respected economist, and an ex-MS and US state department economist. He is orthodox in thinking and the market knows his views very well.

The hope is that Erdogan will give Simsek the authority to do whatever it takes now to avert another balance of payments crisis in Turkey which this time around has the potential to develop into something more systemic with fears over banks runs in a worst case scenario.

Obviously given Erdogan’s well known unorthodox monetary policy views - he thinks high interest rates cause inflation - and his track record of removing orthodox central governors (Yilmas, Basci, Cetinkaya and Agbal) there is concern that Simsek will not be able to hold to his orthodox policies (higher policy rates) for long and that a similar fate awaits him as the prior central bank governors.

I am taking some greater solace both from the appointment of Yilmaz as VP, but also rumours in the media that Hafize Gaye Erkan will be appointed to replace the incumbent unorthodox CBRT governor, Kavcioglu.

Erkan would be the first women appointed to head the central bank. She is known to be secular - non headscarf wearing. And she has an excellent, market friendly CV. She had a PhD in finance from Princeton, and worked at both GS and First Republic in senior management positions. She is thought to be orthodox in economic outlook but knows banks and banking inside out.

I think the combination of Yilmaz as VP, Simsek as Finance and Treasury minister, and Erkan as central bank governor will provide some safety in numbers for the orthodox policy team. I think this time around it would be more difficult for Erdogan to sack Simsek, Ercan, et al.

Indeed, I think the appointment of Yilmaz, Simsek and Erkan (if confirmed) suggests that there has been a change of economic policy advisers around Erdogan and a more orthodox, business friendly team are now in place in the presidential palace with Erdogan’s ear. And I think they have in unison repeated the message that unless economic policy is reversed, the Turkish economy risks falling off a cliff into a systemic crisis.

The problems are significant but with Simsek, Erkan and Yilmaz in place there is at least now a chance of turnaround. There is hope.