Turkey set to keep economic policies

Turkey set to keep economic policies

2014-07-08 11:30

Istanbul - Turkish officials say key economic ministers will stay in post if, as expected, Prime Minister Tayyip Erdogan becomes president next month, and they dismissed fears that policy would take a populist turn, jeopardising more than a decade of strong growth.

As the first direct election to the presidency approaches, Erdogan's outspoken criticism of the central bank's tighter monetary policy and a planned tax amnesty that could waive billions of lira in unpaid taxes have raised concerns among investors that crowd-pleasing measures could weaken economic discipline.

There has also been speculation that the highly regarded double act of finance minister Mehmet Simsek and deputy prime minister Ali Babacan could be broken up in favour of more colourful political figures, but senior government officials told Reuters that was unlikely.

"These policies will continue with the same decisiveness. The ministers who will implement them will continue in their posts; there does not appear to be a question mark about that," one senior official said.

"In particular, there is no problem concerning Babacan and Simsek. It is seen as certain they will continue their duties."

Although any future cabinet would be selected by Erdogan's successor as prime minister, analysts and officials widely expect that as president, Erdogan would secure a loyalist for the job.

Battle of wills

Babacan and Simsek have guided the Turkish economy towards unprecedented stability in recent years, whilst trying to tackle long-term imbalances including inflation and a stubborn current account deficit. Erdogan is acutely aware of the importance of their investor-friendly, prudent approach to Turkey's international credibility, which should guarantee they remain a team at least until 2015 parliamentary elections, government officials say.

Erdogan's personal preference for a more pro-growth economic policy has, however, given rise to talk of a battle of wills in the top tiers of government that could shift in his favour if, as expected, Babacan leaves politics after the parliamentary elections.

"So far Babacan and Simsek have complemented each other. It is difficult to say what will happen in the long term, but under current circumstances Babacan will quit politics and run his own business," another senior government official said, noting that the reserved and somewhat enigmatic deputy prime minister was reaching a three-term parliamentary limit imposed by the ruling AK Party.

That uncertainty adds to the worries of investors already uneasy about growing security risks from neighbouring Syria and Iraq, government interference in monetary policy and the prospect of Turkey becoming more authoritarian under an Erdogan presidency.

If Erdogan triumphs in August's polls he is expected to take on a refashioned presidency, pushing for more executive powers in what has hitherto been a largely ceremonial role.

Since he came to power in 2002, Turkey has enjoyed strong economic growth, averaging more than 5% in his first decade, and inflation has fallen to 9.32% as of June from 32%.

However, some analysts argue that without fundamental reforms, such as upgrading its governance institutions and improving its education system, Turkey will likely see growth of only 2 to 4% over the long term.

Babacan and Simsek are sharply at odds with others in government who, backed by Erdogan, have been pushing in particular for the central bank to cut interest rates sharply after a steep hike in January to halt a slide in the value of the lira.

That rift could continue beyond the presidential election, and if Erdogan becomes head of state he is likely to appoint a 'council of wise men' advisors in the presidential palace to guide policy. If he does so, analysts will keep a keen eye on whether the architects of Turkey's recent fiscal stability will be included.

Babacan in particular has clashed with Turkey's combative premier, most notably in 2010 when Erdogan rejected a fiscal rule plan that would have cut public spending and soothed investors looking for guarantees of Turkey's budgetary discipline.

Free market champions

In recent months markets have reacted with alarm to Erdogan's repeated attacks on the central bank after the late January rate hikes, raising concerns over the independence of the central bank. His repeated assertions that high interest rates cause high inflation have also prompted some to question his grasp of economics.

His views are backed by Economy Minister Nihat Zeybekci, in charge of trade, who favours a more growth-oriented policy and has also complained that high interest rates and a strengthening lira are damaging exports.

Erdogan has reaped political dividends from his policies of low interest rates and a booming construction sector, but Hurriyet columnist and former central banker Ugur Gurses said he might not have grasped the risk of pursuing such policies in current circumstances.

"Turkey has so far enjoyed the yields of ample global liquidity and neglected structural reforms. However, the PM is not yet aware of that, and he still says, 'We have done it, we have succeeded'. This is where the danger lies," he said.

But for all his rhetoric, analysts say Erdogan will not risk the fundamentals that have brought such economic success for Turkey. Former Merrill Lynch banker Simsek is only on his second parliamentary term and will likely stay central to economic policy making, whilst a way may even be found to keep Babacan, believes Jonathan Friedman, Turkey analyst for London-based Control Risks.

"Once president, and provided he does well in parliamentary elections, (Erdogan) will pull back from the populist rhetoric," Friedman told Reuters.

"Ultimately, Erdogan and the (ruling) AK Party have always seen being champions of the free market and foreign investment as key to their strategy of remaining in power - and this will not change under an Erdogan presidency."