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Şimşek signals Turkey’s ‘return to rational ground’

New finance minister's in-tray will be dominated by tackling the country's domestic economic issues

Simsek Erdogan Reuters/Umit Bektas
Şimşek's goal to reduce inflation to single digits suggests a push to raise interest rates rather than drive them down as planned

Turkish President Recep Tayyip Erdoğan has announced his new government after winning the second round of presidential elections last week.

Following a tense election period, speculation has been rife as to whether he would interpret his victory as an endorsement of his policies, or whether being forced into a second-round run-off would encourage a revision instead.

The new government suggests the latter.

The newly appointed finance minister, Mehmet Şimşek, a former economy chief who is favoured by the markets for his preference for orthodoxy, has replaced Nureddin Nebati.

His return suggests that, at the very least, the harder elements of Erdoğan’s economic policies will be reined in or reversed.

Şimşek has already announced that Turkey “has no choice but to return to rational ground”.

His assertion of a medium-term goal to reduce inflation to single digits also suggests that there may be a reversal of the push to drive down interest rates and a push to raise them instead. 

It is unclear, however, to what extent Şimşek will be able to implement his ideal policies. Erdoğan has said very little on the matter of changes to economic policy. Moreover, the Turkish president’s relationship with his finance ministers and central bank governors has been chequered over the past few years.

It is in this context that the situation remains unclear. Has Şimşek been appointed as a tactic by Erdoğan to buy some respite with the markets before a renewed push of unorthodoxy? Or will Şimşek actually be permitted to impose the sweeping reversal that many in the markets believe are essential in order to attract foreign investors again?

In any case, his appointment and his firm language regarding the necessity of change hints that some sort of compromise has been reached and that Erdoğan acknowledges the necessity of some change to tackle the economic crises.

President Recep Tayyip Erdoğan addresses a meeting of business leaders on Tuesday, two days after his runoff winReuters/Umit Bektas
President Erdoğan addresses a meeting of business leaders after his run-off win
Rooted in realpolitik

The overhaul of the government in nearly all departments also reflects Erdoğan’s desire for more conciliatory politics abroad that can complement the push to resolve the economic crises at home.

The previous defence minister, Hulusi Akar, and interior minister, Sulayman Soylu, who often clashed publicly with Washington, have been respectively replaced with career bureaucrats Yasar Guler and Ali Yerlikaya, who are seen as less prone to making provocative statements.

In a clear sign of a desire to improve relations and security cooperation that might ease the tensions that have spooked investors, Ibrahim Kalin – an effective interlocuter with Western capitals – has been appointed intelligence chief.

The previous intelligence chief, Hakan Fidan, has become foreign minister. This is a sign that foreign policy will be rooted in realpolitik and that therefore the reconciliation processes with the Gulf states will continue. It also hints that Turkey will engage based on mutual interests rather than ideology that has often governed the dynamics of engagement over the past decade.

This message has been received, as the UAE’s President Mohamed Bin Zayed ratified a bilateral trade deal worth $40 billion, while Saudi Arabia is reportedly considering offering $50 billion worth of contracts to Turkish companies.

Markets are encouraged by a government formation that is less polarising, favours expertise and appears to reflect an appreciation by Erdoğan for the necessity of change.

However, there remains caution over the extent to which this will manifest into favourable policy and how much the Turkish president will tolerate a sweeping reversal of policies that he has insisted are absolutely necessary to restructure the economy.

Nevertheless, the new government sends out a clear message that its focus for the next five years is on tackling the domestic economic issues and that this dynamic will underpin and govern the framework within which foreign policy, political cooperation and international engagement is conducted.

It also sends a clear message that the electorate’s dissatisfaction over the economy has been heard.

It is for this reason that the markets that reacted negatively to Erdoğan’s re-election are now showing cautious signs of relative optimism.  

Sami Hamdi is managing director of global risk and intelligence company The International Interest