There is a big improvement compared to before, but…

There is a big improvement compared to before, but…

The British financial newspaper Financial Times wrote an article analyzing the reaction in the markets after the change of duty in the Central Bank (CBRT).

According to the analysis, the sudden resignation this month of Turkey’s Central Bank Governor Hafize Gaye Erkan could have been expected to create unease among investors that the country’s short-lived experiment in monetary orthodoxy is over. The fact that the market’s reaction is so quiet shows that the real power in the economic leadership of the country now belongs to the Minister of Finance Mehmet Şimşek.

However, it was stated in the analysis that it was unhealthy for Şimşek to have a “key man” role on his own, and that Turkey should strengthen the staff in economic management with reputable names.

The highlights of the analysis were as follows:

Hafize Gaye Erkan resigned less than a year after her appointment at the Central Bank, citing the campaign against her in the press. It was a coup, as the US-educated Erkan (Turkey’s first female central bank governor at 44) took an uncompromising stance on the country’s once-shaky monetary policy.

AKP’s President Recep Tayyip Erdoğan appointed Erkan last June. Apparently with his approval, he immediately launched a campaign to combat chronic hyperinflation. In total, it achieved a nearly 36.5 percentage point increase in interest rates, which Erdogan had previously condemned as “diabolical”.


Erkan’s resignation felt like a return to the old days, when Erdogan dismissed presidents who did not share his views on interest rates. However, unlike previous liquidations, Erkan’s departure caused almost no fluctuation in the markets.

That’s partly because Erkan’s replacement, Fatih Karahan, has a background that includes the University of Pennsylvania, the Federal Reserve Bank of New York and Amazon. Analysts such as Goldman Sachs described Karahan as “respected” and stated that Erkan’s departure was not due to policy disagreements.


But the real key to the calm atmosphere in the markets is the reassuring presence of Şimşek, a former Merrill Lynch banker who served in senior economic positions in Erdoğan’s government for 11 years, leaving under troubling circumstances in 2018 and being reinstated after last year’s elections.

Şimşek knows that markets are important for Turkey, which needs foreign investors to buy its bonds. The Turkish media’s hostile portrayal of sinister and conspiratorial foreign investors has fortunately melted away. He also knows that when the currency collapses, citizens suffer further price increases on imported goods. He recognizes the need for continuity in economic policy and, in particular, stability in inflation.

The Central Bank is not yet close to achieving this. Annual inflation is still around 65 percent. Still, fund managers trust Simsek to run the business and, most importantly, to keep Erdogan on his side, and since his reappointment they have proven willing to return to Turkish assets for the first time in years. Karahan is Şimşek’s chosen name for the central bank, and this is enough for Wall Street analysts and investors.

The situation today is a huge improvement compared to five years ago. But it’s still not ideal. The burden on Şimşek’s shoulders is quite high and it is unhealthy for investors to carry such an intense key man risk. A larger group of respected figures at the upper echelons of Turkey’s economic machinery is highly desirable as evidence that Erdogan’s conversion to orthodoxy is fundamental. For now, the mutual distrust between the President and Western fund managers continues. Investors believe that Şimşek is the most important whisperer among them.

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