News Analysis: Optimism rises for Türkiye's return to conventional economic policies after election-Xinhua

News Analysis: Optimism rises for Türkiye's return to conventional economic policies after election

Source: Xinhua

Editor: huaxia

2023-06-09 15:38:00

ISTANBUL, June 9 (Xinhua) -- In his traditional balcony speech following his election victory on May 28, Turkish President Recep Tayyip Erdogan promised to build "a strong economic management" based on the principles of trust and stability with an "internationally reputable" financial team.

For a country that has long been known for taking unorthodox policies, such a promise seemed to be signaling a return to conventional economic management.

The appointment of Mehmet Simsek, a former Merrill Lynch strategist and Türkiye's Deputy Prime Minister for Economy between 2015 and 2018, as the new treasury and finance minister, added to the optimism that Türkiye is on course for more predictable and conventional economic policies.

Indeed, addressing the press during his takeover from his predecessor Nureddin Nebati on Sunday, Simsek said Türkiye has no choice but to return to "rational ground" in its economic policies.

However, his statement did not immediately translate into a recovery for the Turkish lira which lost 7 percent of its value in a single day on Wednesday, as the return to "rational grounds" was interpreted as a halt to the interventions by the central bank to control the value of the lira.

Türkiye's currency has lost over 15 percent of its value against the U.S. dollar since the presidential elections concluded on May 28.

Rational grounds could mean "a loose fiscal policy combined with a tight monetary policy," Ozlem Derici Sengul, a founding partner of Spinn Consulting, an Istanbul-based financial consulting firm, told Xinhua, predicting that easing interventions by the central bank "could rapidly see the lira weakening beyond 25 per dollar."

However, she doesn't expect the country's economic management to give up on its "Liraization Strategy" that aims to increase the weight of the Turkish lira in both assets and liabilities of the banking system to stabilize the pressure on lira.

"Instead of aggressively defending the lira, what's important is to prevent the fall in the exchange rate and increase the lira's lure for investors," Sengul noted.

In a recent report, Goldman Sachs cited increased pressure on the lira to revise its expectations, predicting that the lira's exchange rate would go down to as much as 28 against the dollar in 12 months, a more pessimistic forecast from their previous projection of 22.

Following his re-appointment as Türkiye's finance czar, Simsek, 56, announced on Twitter that "transparency, consistency, accountability, and predictability" will be "the guiding principles for creating a more prosperous and resilient Türkiye."

"These statements carry significant weight because they come from a respected technocrat who knows the Ministry of Finance well," said Mohammed El-Erian, chief economic advisor at the Germany-based financial services company Allianz, in his Bloomberg Opinion column.

"The hope for Türkiye lies in domestic and external financial markets affording Simsek the time to design and carry out a comprehensive set of macro stabilization measures, primarily through enhanced fiscal consolidation, pro-growth and productivity-enhancing structural reforms, and a reduced reliance on ad hoc restrictions," El-Erian said.

In his view, these measures would have a more "substantial impact if accompanied by the restoration of a politically autonomous central bank that is capable and willing to implement a rational interest-rate policy."

For her part, Sengul pointed to communication as the biggest problem for the central bank which "has a certain level of transparency."

"The bank's face-to-face communication with investors and experts is extremely weak ... It needs to reassure local and international investors that the atmosphere is ripe for them to get back into Turkish assets," she explained.

In addition, restoring confidence also requires Simsek to extend his overhaul beyond the central bank to include institutions such as Türkiye's statistics agency and the banking watchdog, Sengul added.