The Turkish Central Bank (CBRT) has been mired in scandal in light of orthodox governor Hafize Gaye Erkan’s dramatic resignation, but analysts say that President Erdogan’s programme of economic normalisation has emerged unscathed.
Erkan, the first female governor of the central bank, was appointed in June and has since overseen steep hikes in interest rates. Erkan, a former financier at Goldman Sachs, was appointed by Erdogan as part of his shift away from the unorthodox monetary policies that have seen inflation reach almost 65% and the lira fall to record lows against the dollar.
Until the appointment of Erkan at the central bank and the similarly orthodox Mehmet Simsek as finance minister, Erdogan had clung to his belief that low interest rates were the answer to rising inflation. Erkan and Simsek’s reforms have been widely welcomed by foreign investors, who have been steadily increasing exposure to Turkish debt markets and lira-denominated bonds.
However, Erkan resigned last week following media reports in Turkey that she had given her father an unofficial role at the central bank and that he had sacked an employee. Erkan branded the reports “unfounded” and “completely unacceptable,” adding that “a major character assassination campaign has been organised against me recently.” She said she was stepping down “in order to prevent my family and, moreover, my sinless child from being further affected by the process.”
Erkan has been replaced by Fatih Karahan, a former economist at Amazon and the Federal Reserve Bank of New York. JP Morgan and Morgan Stanley have suggested that Karahan will take an even more hawkish stance on inflation than Erkan. JP Morgan analyst Fatih Akcelik wrote in a note to clients that “while sudden leadership changes bring discomfort for investors, we see the new CBRT Governor as position for disinflation and the lira […] we expect high rates for longer along with tighter macroprudential measures.”
Indeed, while the lira immediately weakened on the back of the news, emerging markets economist Timothy Ash told Disruption Banking that the developments are in fact “positive” for sentiment in Turkish markets.
“Firstly, this shows that the CBRT is accountable – the allegations against Erkan and her family were very serious, and they could not go unanswered,” he said. “Second, it shows that Erdogan still trusts Simsek. Erkan was Simsek’s hire and while the allegations against her were embarrassing to all, Erdogan still gave Simsek the choice of the new governor. Furthermore, Fatih Karahan is respected, and all the other credible deputy governors have stayed.”
This optimism has perhaps been reflected on the Borsa Istanbul, which has continued to make gains in the days since the news broke. The Istanbul stock exchange was one of the best performing emerging market exchanges last year and has attracted further interest this year so far.
It is likely that Turkey will attract more foreign capital as its policy of economic normalisation takes hold. While there is still economic pain ahead – not least because of the necessity for a period of tight monetary policy to bring prices back under control – there is a sense that Turkey is finally looking investible once again.
Perhaps most encouraging for foreign investors, in Ash’s words, is that “orthodox policy faced a major test and endures.”
Author: Harry Clynch
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