World Economy

Turkey Vulnerable to Stringent Market Pressure

Turkey Vulnerable to Stringent Market PressureTurkey Vulnerable to Stringent Market Pressure

Turkish deputy prime minister, Mehmet Simsek, is the last man standing from the team feted by investors as the driving force behind the nation’s rapid growth years.

One-by-one, President Recep Tayyip Erdogan is removing the AK Party policy makers whose focus on balancing budgets, taming inflation and fiscal stability led to average growth of 5% over 13 years to 2015. His handpicked prime minister, Ahmet Davutoglu, decided to step down on Thursday, ending a power struggle over management of the economy and Erdogan’s efforts to add executive power to his traditionally ceremonial office, Bloomberg reported.

Like Davutoglu, former Merrill Lynch strategist Simsek has defended the kind of orthodox monetary policy that so riles Erdogan, specifically the use of high interest rates to curb inflation. Erdogan argues that lower borrowing costs and subsequent faster growth would more effectively slow price gains, and with Davutoglu gone, there may be little to insulate Simsek from pressure to fall into line.

That may spell the end to an unspoken truce between Erdogan and investors, who tolerated his quest for more power as long as people trusted by markets like Simsek ran the economy.

“There would be no AK Party economic miracle without this team of capable technocrats,” said Tim Ash, head of emerging-market strategy at Nomura International Plc in London. “The concern now is that without these individuals, and with a coterie of untested economic policy advisers around Erdogan, Turkey will be very vulnerable to market pressure.”

  Retaining Rationality

In a speech on Friday, his first since the showdown between Erdogan and Davutoglu, Simsek said Turkey’s economic policies should follow global norms and “rationality” should be retained to attract foreign investors. That’s the only way in which banks can continue to lend to companies to drive the economy, he said.

Simsek, 49, became minister of the economy in 2007. He’s widely credited for maintaining fiscal discipline as finance minister between 2009 and 2015, a period in which the ratio of public debt to gross domestic product fell to 33% from 46%, according to data compiled by Bloomberg. He worked closely with former deputy prime minister Ali Babacan, who was removed from the cabinet last year under pressure from Erdogan.

Until last week, investors had largely ignored growing turbulence in Turkey fueled by domestic politics, the spill-over of Syria’s war and Erdogan’s renewed attempt to crush Kurdish separatists. A November election guaranteed four years of uninterrupted AK Party rule, and the value of Turkish debt and stocks held by foreigners rose to about $87 billion as of April 29 from about $72 billion at the end of 2015.

S&P Global Ratings maintained its BB+ junk rating on Turkish debt on Friday while lifting its outlook to stable from negative. Moody’s Investors Service and Fitch Ratings both rate Turkey at their lowest investment grades.