(Bloomberg) -- Turkish President Recep Tayyip Erdogan will appoint Mehmet Simsek as his new treasury and finance minister, according to people with direct knowledge of the matter, bringing back an advocate of conventional economics to shore up market confidence after his re-election victory.
Simsek, 56, is expected to normalize Turkey’s policies after years of unorthodox moves that resulted in runaway inflation and the lira sinking to record lows, the people said, asking not to be identified citing sensitivity of the matter.
Erdogan, who won a vote on Sunday against Kemal Kilicdaroglu to extend his more than two decades in power, is known for meddling heavily in monetary policy and firing officials who don’t toe the line. He will need to give Simsek enough autonomy to convince foreign stock and bond traders that the shift is more than window-dressing.
Turkish equities jumped on the news, with the banking index rising almost 7% in Istanbul. The cost of insuring against a sovereign default dipped, while Turkey’s 10-year dollar bond yields fell to 9.3%, the lowest in three weeks.
The lira was slightly weaker — at 20.88 against the dollar — as traders weighed the possibility of an end to back-door state interventions designed to prop up the currency.
Erdogan’s office and a spokesperson for Simsek declined to comment. The president will announce his new government on Saturday.
Investors have been on edge since Erdogan cruised to victory in the presidential runoff. After the ballot, the 69-year-old pledged to install “a finance team with international credibility.”
Simsek, a former Merrill Lynch strategist respected by investors for his defense of orthodox economic views, is a a familiar face for the Turkish leader. He worked as both a finance minister and deputy prime minister in past Erdogan cabinets. Simsek stepped down in 2018 during Turkey’s transition to an executive presidential system that gave Erdogan sweeping powers.
He rebuffed overtures from Erdogan earlier this year and said he wouldn’t take part in active politics. After Sunday’s election victory, they met again, with Simsek asking for autonomy in monetary policy as a precondition to joining the cabinet, according to the people familiar with the matter.
Devlet Bahceli, the head of a Turkish nationalist party that’s a key part of Erdogan’s ruling coalition, lobbied for Simsek’s inclusion, the people said.
Even if Simsek secures the independence he needs to fix the nation’s finances, doubts about Erdogan’s patience remain.
“He seems to me like a token appointment to try and appeal to markets post-election,” said Henrik Gullberg, macro-economist at Coex Partners Ltd. “The pressure on him to do what the president wants will be very strong, especially when or if growth is too weak for the government’s liking.”
The president is adamant that lower interest rates curb inflation, an idea that runs directly counter to how most central banks devise policies. Naci Agbal, the last orthodox central banker to serve under Erdogan, was sacked only four month into the job in 2021 for raising rates aggressively.
The manner of Agbal’s ouster and the return to ultra-low rates under his successor, Sahap Kavcioglu, are a reminder for skeptics who question how long any adjustment under Simsek will last.
“The issue isn’t Mr. Simsek himself,” said Erik Meyersson, chief emerging markets strategist at Stockholm-based SEB AB. “There is just no mechanism to prevent President Erdogan from doing what he did to Mr. Agbal.”
Erdogan is a self-described “enemy” of interest rates and has given no signal he’s ready to dial back ultra-loose monetary policy.
The “inflation rate will come down along with the interest rates, so that we will come to a point where people will be relieved,” Erdogan told CNN before the runoff. “I say this speaking as an economist. This is not an illusion.”
Even with Simsek at the helm before 2018, Turkey wasn’t aggressively pursuing its official inflation target of 5%. Annual price gains were at just under 12% at the end of 2017.
Yet Simsek’s administration managed to keep the G-20 economy growing at a pace that would appease Erdogan without stoking runaway inflation.
Since Simsek’s departure, consumer prices spiraled out of control after consecutive currency crises. Inflation topped 85% last year before a slowdown thanks to statistical effects. It’s still above 40%.
In his final cabinet stint, Simsek made frequent trips to London with then central bank Governor Murat Cetinkaya. They tried to soothe investors’ concerns over Erdogan’s ambitions to take greater control of economic policy, which were causing the lira to nosedive.
Simsek will replace Nureddin Nebati, who’s been finance minister since late 2021. Nebati, previously a deputy finance minister, was perceived to be close to former economy czar Berat Albayrak, a son-in-law of Erdogan.
Erdogan Hands Economy Job to Son-in-Law as Old A-Team Bows Out
“There will likely be an invisible tug of war each time a critical decision needs to be made,” Meyersson said. “Ultimately, the political institutions implemented by President Erdogan will ensure that arbitrary unorthodox views trump more competent management of the economy.”
--With assistance from Beril Akman, Kerim Karakaya, Cagan Koc, Asli Kandemir and Tugce Ozsoy.
(Updates with latest lira and stocks performance.)
©2023 Bloomberg L.P.
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