Turkey: New cabinet intensifies concerns over the direction of economic policy
July 26, 2018
On 9 July President Erdogan announced his cabinet, which is a mixture of loyalists and ministers drawn from the private sector. The key economic appointment was Berat Albayrak, the president’s son-in-law, who will lead the new treasury and finance ministry. Although Albayrak is technically qualified to hold the position—he has a background in finance, and experience as both a business executive and government minister—his family ties to Erdogan make it less likely that he will act to curb the President’s unorthodox economic views, increasing the risk of overheating and a hard economic landing. So far Albayrak has struck a moderate tone, but it is unclear to what extent this will translate into concrete policy changes.
Well-respected pro-business ministers Mehmet Simsek and Naci Agbal, who until the election were largely responsible for economic policy, were meanwhile sidelined (Agbal retains a role in the government as chief of budget and strategy). The move suggests that soothing market concerns over rising economic imbalances is not a priority for Erdogan. On the other hand, since being appointed Albayrak has addressed investors’ worries directly, pledging fiscal discipline, a focus on reducing inflation, Central Bank independence and structural reforms. According to a recent press release from the treasury and finance ministry, the government has begun to take steps to rein in spending in the 2018 financial year, although the size and scope of such measures were not specified.
A clearer idea of the future direction of economic policy should come from the upcoming Medium-Term Program. However, sharp fiscal tightening is unlikely, despite Albayrak’s recent remarks, as President Erdogan will likely continue prioritizing short-term growth—particularly with a view to ensuring political support for local elections in March 2019. According to Nafez Zouk, lead emerging markets economist at Oxford Economics, “Albayrak [is] making the right noises in terms of telling markets what they want to hear”, but that “there are no concrete indications that the government is willing to drop its relentless growth-at-all-costs policies”. Analysts at Capital Economics argue: “If anything, it looks like policy will be loosened further.” On balance, the fiscal stance is likely to remain fairly loose, without being so expansionary that it severely dents market sentiment.
Regarding monetary policy, a seeming disconnect between Albayrak’s rhetoric and policy decisions has already emerged; the Central Bank kept rates unchanged in late July despite soaring inflation and a crumbling lira, increasing worries that Erdogan is influencing monetary policy. Nafez Zouk states: “President Erdogan’s expanded powers include the ability to appoint deputy governors of the central bank, meaning that it will likely remain under the influence of politics.”
Turkey GDP Forecast
Tighter credit conditions and weak investor sentiment will weigh on the economy going forwards. Following rapid growth in Q1, the economy will likely lose steam through the rest of the year. Last month, FocusEconomics Consensus Forecast Panelists saw the economy expanding 4.2% for 2018 as a whole, and 3.6% in 2019. A new Forecast will be published on 31 July.
Author: Oliver Reynolds, Economist