Turkish economic duo key for markets as Erdogan eyes presidency

AFP
Turkey's Deputy Prime Minister Ali Babacan (L) and Prime Minister Recep Tayyip Erdogan (C)take part in a ceremony marking the 52nd anniversary of Turkey's Constitutional Court, on April 25, 2014 in Ankara
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Ankara (AFP) - Markets are keeping a wary eye on the future of Turkey's two key economic policymakers if Prime Minister Recep Tayyip Erdogan is elected president in August polls.

Erdogan is credited with overseeing a transformation of the Turkish economy into a fast-growing emerging market in over a decade in power.

But some analysts are concerned he is seeking to defy the basic laws of economics by pressuring the central bank to slash interest rates despite high inflationary pressures and a still-gaping current account deficit.

Deputy Prime Minister Ali Babacan and Finance Minister Mehmet Simsek, who designed the economic policies of Erdogan's Justice and Development Party (AKP), have reassured financial markets that the government will pursue stable policies.

But it is an open question whether they will stay on if Erdogan -- as expected -- wins the elections on August 10.

- 'Credibility at stake' -

Erdogan is anxious to maintain the high growth and prosperity that is the main source of the AKP's popularity.

But the economy has showed signs of weakness over the past year amid domestic troubles sparked by a wide-ranging corruption scandal in December and mass street protests.

That forced the central bank to hike interest rates aggressively in January, when the lira plummeted partly because of the unfavourable financial climate for emerging markets.

But, fearing that high interest rates could jeopardise growth in the run up to elections, Erdogan has fired off strident attacks on the central bank for failing to slash its rates back to pre-January levels.

Babacan and Simsek, meanwhile, have defended the central bank, saying its credibility is crucial for Turkey.

Analysts say that without an independent central bank, monetary policy will pander to political considerations.

"If markets begin to think the bank is acting under political pressure, the bank will risk losing one of the biggest tools in its hands: credibility," said Mustafa Kutlay, an analyst at Ankara-based USAK think tank.

- 'Markets trust Babacan, Simsek' -

Babacan and Simsek's presence in the next cabinet is thus seen as guarantor of the bank's credibility.

"The greater the role of Ali Babacan in the new power structure going forward, the less the risk is to the central bank," said Andy Birch, senior economist at IHS Global Insight.

"Markets trust Babacan to provide a bulkhead to the other elements of the AKP senior membership that would pursue a more aggressive approach to the central bank," he told AFP.

"If Babacan and, to a lesser extent, Mehmet Simsek are marginalised, real concerns will emerge that the government is making a move to undermine the authority of the central bank."

The prime minister's mockery of the bank also fuelled debates that its governor Erdem Basci could resign before his five-year tenure expires in 2016, and the government might then appoint a governor that backs its pro-growth strategy.

Erdogan has set an ambitious target to make Turkey one of the world's top ten economies by 2023.

But the bank has resisted the pressure in part so far, only modestly trimming its main interest rate this week.

On Thursday, it shaved half a percentage point from its one-week repo rate to 8.25 percent, the third consecutive reduction since May.

The rate is still higher than the pre-January level of 4.5 percent, however.

"Markets are worried about whether Babacan and Simsek will stay in office because they know that the two have the vision and perspective to contain any crisis in the event that the economy hits a wall," financial commentator Ugur Gurses said.

Whether they would remain in the cabinet would depend on the economic climate, he felt.

"If Erdogan is elected president and the economy grows at a moderate pace, they are unlikely to stay but if economic circumstances and financial markets turn unfavourable, Babacan may stay until 2015," Gurses told AFP.

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