Turkey: New finance minister and Central Bank governor appointed, likely prompting shift towards more orthodox policy
On 10 November, President Erdogan appointed former deputy prime minister Lutfi Elvan as new finance minister. Elvan replaced the president’s son-in-law, Berat Albayrak, who announced his resignation on 8 November. This came one day after President Erdogan sacked the Central Bank’s governor, Murat Uysal, and replaced him with former finance minister Naci Agbal. While the president’s action likely influenced Albayrak’s decision, he publicly stated that health reasons had driven his resignation. In a speech given on 11 November, President Erdogan suggested that with the new leadership, the country would be more focused on restoring economic credibility, hinting at a shift towards more orthodox policy. However, much depends on the new minister’s ability to implement much-needed structural reforms and Erdogan’s willingness to tolerate tighter monetary policy.
Under the stewardship of pro-market Lutfi Elvan, economic policy is expected to be geared towards enhancing macroeconomic stability. This should, for example, enable foreign investors to trade the Turkish currency and help rebuild the Central Bank’s foreign currency buffers, improving sentiment among foreign investors and local businesses as a result. Elvan takes the helm at a time when the economy is not only reeling from the blow of the global pandemic but also suffering from a severely weakened currency, depleted foreign exchange reserves and sticky inflation, hampering economic activity. Although the lira rallied in the wake of the departure of Uysal and Albayrak, the currency was still down 22.8% in year-to-date terms against the U.S. dollar on 18 November.
Notwithstanding the expected return to a more conventional policy stance, structural challenges lie ahead for the Turkish economy and currency: Investor confidence hinges on Elvan’s freedom to pursue sensible economic policies and necessary structural reforms to tackle the country’s overreliance on foreign capital, stabilize its inflation profile and improve its trade balance. On the monetary front, while early signs are positive—Agbal hiked rates markedly during his first meeting in charge in mid-November—it remains to be seen whether Erdogan will tolerate a prolonged period of higher rates and consequently slower growth. Moreover, structural lira weakness is likely to continue due to tensions in the Mediterranean with Greece, depleted foreign currency reserves and related liquidity shortages. Consequently, Scope Ratings downgraded Turkey’s long-term foreign currency rating to B and revised the outlook to negative on 6 November—shortly before Elvan’s appointment—citing “severe external vulnerabilities and risk of a balance of payment crisis”.
Maya Senussi, senior economist at Oxford Economics, comments: “The prospect of sounder policies has improved somewhat following the change of economic leadership.” That said, she goes on to say: “Improved policy credibility and reforms to reduce external imbalances on a sustained basis are needed to lessen the risk of crises in the future. However, the government’s commitment to such reforms has thus far only been cosmetic. An erosion of institutional strength has already cost Turkey its investment grade status, and further political and institutional uncertainty could undermine the economy’s resilience.”