In­vestors see cause for worry in Tur­key’s di­vided eco­nomic team AK Party legacy built on eco­nomic growth

Kuwait Times - - BUSINESS -

ANKARA: The Turk­ish gov­ern­ment’s eleven­th­hour reschedul­ing of a meet­ing of its eco­nomic team to in­clude the pres­i­dent last month was an­other stark re­minder for in­vestors: When it comes to pol­icy, Tayyip Er­do­gan likes to call the shots. Er­do­gan’s drive for lower in­ter­est rates has rat­tled fi­nan­cial mar­kets and, along with alarm about the crack­down af­ter the July coup and a stronger dol­lar, con­trib­uted to the lira cur­rency los­ing a fifth of its value this year. Of­fi­cials say this has widened a rift in the eco­nomic team be­tween re­formists who want more to be done to ap­pease in­ter­na­tional in­vestors - such as Deputy Prime Min­is­ter Mehmet Sim­sek and Fi­nance Min­is­ter Naci Ag­bal - and pop­ulists such as Deputy Prime Min­is­ter Nuret­tin Canikli and Econ­omy Min­is­ter Ni­hat Zey­bekci.

Adding to the con­fu­sion is the cen­tral bank, which raised rates for the first time in nearly three years last month, de­spite Er­do­gan’s ap­peals. “There isn’t com­plete har­mony among the eco­nomic lead­er­ship. On one side, there are those who are at­tuned to the needs of the global econ­omy and act as an­chors for the mar­kets. On the other, there are those who want more na­tional eco­nomic poli­cies,” a se­nior of­fi­cial from the rul­ing AK Party said. “It seems Sim­sek and Ag­bal are an­chors in the eyes of the mar­kets, and they are cru­cial for the Turk­ish econ­omy to be un­der­stood in­ter­na­tion­ally.”

The party has re­lied on the econ­omy’s strong growth as the pil­lar of its suc­cess. Di­vi­sions among its top ranks could not come at a more in­op­por­tune time, both for Tur­key’s eco­nomic sta­bil­ity, and the party it­self, as slow­ing growth and stub­born in­fla­tion risk un­der­mine its achieve­ments in the eyes of vot­ers. Of­fi­cials at Sim­sek and Ag­bal’s of­fices were not im­me­di­ately avail­able for com­ment. “The pol­icy set­ting is not trans­par­ent,” said Dan Raghoo­nun­don, an emerg­ing mar­kets port­fo­lio man­ager at Janus Cap­i­tal. “It’s very hard to know who is in charge and when mar­kets don’t have trans­parency or vis­i­bil­ity they tend to as­sume the worst.”

When Prime Min­is­ter Bi­nali Yildirim, an Er­do­gan stal­wart who is gen­er­ally seen as be­ing aligned with the pop­ulists, last month abruptly resched­uled a meet­ing of the Eco­nomic Co­or­di­na­tion Com­mit­tee (EKK), sources in his of­fice cited a sched­ul­ing con­flict. How­ever, some an­a­lysts saw the last-minute change as a move by Er­do­gan to stamp his au­thor­ity on a meet­ing where weak­ness in the lira was due to be dis­cussed. Er­do­gan, who as pres­i­dent is sup­posed to be above party pol­i­tics, does not nor­mally at­tend meet­ings of the EKK. An of­fi­cial at the pres­i­dency said there was noth­ing un­usual in his at­ten­dance at the resched­uled meet­ing. “The econ­omy is very im­por­tant and Pres­i­dent Er­do­gan just wanted to dis­cuss the lat­est de­vel­op­ments and mea­sures. Such a meet­ing is not an ex­cep­tional is­sue for the gov­ern­ment, of­fi­cials, or Pres­i­dent Er­do­gan him­self,” the of­fi­cial said.

In the past, the AKP was seen as be­ing able to bal­ance pop­ulist rhetoric with the needs of fi­nan­cial mar­kets - de­liv­er­ing hos­pi­tals, roads and air­ports, and en­sur­ing growth and jobs, while re­main­ing sen­si­tive to the needs of mar­kets. Lately, in­vestors aren’t so sure. “Un­til now, they could al­ways come to a com­pro­mise of some sort, and re­solve their dif­fer­ences. But now, there are con­cerns they can­not find mid­dle ground and that the di­vi­sions could con­tinue to get worse. This is the risk that has mar­kets wor­ried,” a lo­cal banker said.

Who’s in charge?

Yildirim, who re­placed Ah­met Davu­to­glu as prime min­is­ter in May af­ter wide­spread re­ports of di­vi­sions be­tween Davu­to­glu and Er­do­gan over the econ­omy, has gone to lengths to say he is in charge of the eco­nomic team. Of­fi­cials say he has re­cently shown some sym­pa­thy with the re­formist camp, al­though he main­tains his al­le­giance to Er­do­gan.

“I am the cur­rent chair­man of the EKK, and the per­son who will speak about the econ­omy af­ter me is... Deputy Prime Min­is­ter Mehmet Sim­sek,” Yildirim said in a re­cent in­ter­view with state broad­caster TRT. “In sit­u­a­tions when I am not present, he is the one who has all the say and re­spon­si­bil­ity re­gard­ing the econ­omy.” All the while, Er­do­gan has been un­re­lent­ing in call­ing on the cen­tral bank to lower in­ter­est rates. “Those in the fi­nan­cial sec­tor can sit com­fort­ably... but the real in­vestor is un­for­tu­nately ex­pe­ri­enc­ing hard­ship. So I say: ‘Drop these rates, brother,’” he said a speech on Satur­day to mark the open­ing of a new shop­ping cen­tre in Is­tan­bul.

In­vestors are still try­ing to fig­ure out the po­si­tion of the cen­tral bank un­der Mu­rat Cetinkaya, who was only ap­pointed in April. Pol­icy is de­cided by the seven-mem­ber mon­e­tary pol­icy com­mit­tee which in­cludes the gov­er­nor, four deputy gov­er­nors and two other ap­pointees. Er­do­gan, who has de­scribed him­self as an “en­emy” of in­ter­est rates, says the cen­tral bank is in­de­pen­dent but he has a right to crit­i­cize it. The bank ini­tially cut rates fol­low­ing Cetinkaya’s ap­point­ment, in line with Er­do­gan’s de­mands. Last month’s rate hike, how­ever, was seen as ap­peas­ing the mar­kets.

As the lira has hit a series of record lows, Er­do­gan has re­sponded by urg­ing Turks to cash out their for­eign cur­rency hold­ings and buy ei­ther lira or gold. For the time be­ing, that may be the only boost to the lira. “This kind of dis­so­nance be­tween the pres­i­dent’s con­cept of in­ter­est rate pol­icy and that of the mar­ket is cre­at­ing a huge ob­sta­cle for the cen­tral bank to in­ter­vene and sta­bi­lize the cur­rency,” said Phoenix Kalen, di­rec­tor of emerg­ing mar­kets strat­egy at So­ci­ete Gen­erale. There was likely to be “much more pain” for the lira ahead, Kalen said.

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