Turkey - Simsek is a keeper

Erdogan shows his pragmatism again

It is interesting listening to the international investment community when it comes to Turkey, as the name mentioned almost as much as Mehmet Simsek, is Naci Agbal. The general narrative is “yes, we know Mehmet is an excellent guy, and is doing the right thing, but we thought that of Naci Agbal, when he was hired as central bank governor in November 2020, but Erdogan soon tired of his economic policy orthodoxy, and he was fired by March 2021, and we think a similar fate awaits Simsek”.

Never say, never, and sure, Erdogan has a track record therein - seven central bank governors in eight years tells a story. However, I think this time is different - famous last words.

I think this time is different, as Erdogan’s support for Simsek has now been tested on numerous occaisions, which suggests there is more enduring support from Erdogan for Simsek.

First, Erdogan hired Simsek back as finance minister, after the

May 2023 elections, against expectations, and after Erdogan had secured a huge and surprising mandate in those elections. He ran on an unorthodox policy agenda in the run up to elections, but this still did not stop him doing the 180 degree turn and hiring Simsek. It could be argued he had the mandate to continue with unorthodoxy, but did the opposite, which suggests an understanding by Erdogan of the limits now to unorthodox policy - he tried it, it failed.

Second, Erdogan followed this up, by hiring an orthodox team under Simsek, at the CBRT, including the then governor, Hafize Gaye Erkan, and deputy governors Cevdet Akcay, and Hatice and Fatih Karahan.

Third, Erkan et al were allowed to hike policy rates from 8.5% to 45% thru to January 2024, even higher than had been assumed had the opposition won the 2023 elections.

Fourth, when Erkan suffered a HR “mishap” Erdogan accepted Simsek’s choice to replace her as governor, appointing Fatih Karahan as her replacement. He could have blamed Simsek for the original poor decision to hire Erkan, but gave him full backing still in appointing Karahan as governor. He showed his enduring support for Simsek.

Fifth, again, against all expectations, Erdogan green lighted another huge policy rate hike, of 500bps, ahead of the local elections earlier this month. The AKP was struggling already in the polls, it was clear that policy tightening was hurting its support, but when push came to shove Erdogan still backed Simsek, in a decision which had significantly negative political consequences. But he trusted Simsek.

Sixth, the AKP’s crushing local election defeat sent a clear signal that the number one issue for the election is inflation. In his acceptance (of defeat) speech, Erdogan identified inflation and the economy as the problem and doubled down in affirming his support for the policies of Simsek and the CBRT team. The election clarified to all that the number one economic problem in Turkey is inflation and the only solution is policy tightening under Simsek. This is now the absolute universal view, and there is widespread acceptance that the only path to political resurrection for Erdogan is by signing up/on to Simsek’s austerity programme. There is simply no alternative as the prior unorthodox policy was disastrous and to a large extent is to blame for the current high inflation rate in Turkey. If Erdogan is to win the next election, he has to put the inflation genie back in the bottle, and Simsek is the best means to achieve that.

Seventh, in explaining Erdogan’s apparent conversion to Simsek’s orthodoxy I think we have to look at the changing team of advisers around him at present, and more are willing to tell truth to power that the unorthodox policies are not working, and there has to be a return to orthodoxy. Perhaps there is also an understanding that the prior unorthodox policies had taken Turkey to the brink of a systemic crisis in mid 2023, and a return now would push the economy back over the precipice of that same systemic crisis.

Eighth, it also seems that Simsek’s engagement with Gulf states for financial support has been helpful on selling the more orthodox narrative to Erdogan. Gulf states have changed the way they provide financial support to friendly states - whether that is Bahrain, Tunisia or Turkey. They will provide bailouts but by providing funds for investment, but want those funds back with a return. And the Gulf states are savvy enough to know that only orthodox macro policy will generate the returns of these funds. So the message to the Erdogan administration from UAE, et al, has been sure we will providing a financing backstop with investment resources, but we demand good policy.

Finally, important add here that while Erdogan pinned his own colours to the unorthodox policy mast for a few years now, Erdogan’s track record over the past twenty odd years in office is of an arch pragmatist. When needs must Erdogan absolutely can do policy 180 degree turns. And I think he now recognises his mistakes of the past which brought the current inflation crisis and now recognises the need for change.