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Critical junction for the Turkish economy

The new Cabinet members in charge of the economy will either realistically address the pressuring problems or take drastic measures to truly re-balance Turkish economy along with the change of season. Or they will try to keep the ball rolling until the March 2019 local elections for the sake of political power. And the latter choice could spell disaster.

Critical junction for the Turkish economy

Scanning through foreign newspapers this morning, President Erdogan’s oath taking in parliament with his enhanced presidential powers appears all over the headlines.  Turkey as of today will thus officially switch from a parliamentary system to a presidential system.  Before the day ends, Erdogan will announce the new governmental structure; appoint vice presidents, ministers and other senior officials.  A technocrat, non-elected cabinet is awaited according to Erdogan’s statements and this will be a first for Turkey during “democracy” years.

As Deutsche Welle puts it, “Turkey is preparing to endow its increasingly Islamist, nationalist and authoritarian president with an unprecedented amount of power.”  Erdogan from today and on will be able to regularly issue presidential decrees overruling the judiciary at any time; hence, the state of emergency will be lifted as it is no longer needed for him.

While a wide range of social problems and a web of challenging foreign relations wait the new Erdogan term, the economy is of paramount importance.  The pressuring economic imbalances ahead of March 2019 local elections pose tangible risks for the AKP losing the control of a number of big cities across Turkey.

Thus, the economy needs urgent attention as tough decisions should be made followed by tougher actions.

Over the weekend, President Erdogan once again reiterated that he would address the “structural economic problems” of high interest rates and inflation and a wide current account deficit, in his first speech since being re-elected on June 24.  Attacking high inflation by all means to lower the high interest rates could be a good start for the new economy team.  Yet, in the possible absence of Mehmet Simsek in the new cabinet starting with trying to lower the rate of interest first with a wishful approach to lower inflation could as well trigger another bout of storm in Turkey’s markets.

As trade wars are shaking the global financial markets, Turkey is again stuck between growth focused economic policies and financial/monetary discipline.  As easy money has dried up, the resulting credit crunch, higher cost of borrowing, weak lira and a mouthful private sector debt are all aligning to push the Turkish economy into a recessionary environment.

As per one calculation, Turkey’s private sector has restructured a sizable 24 billion debt in total over the past year and this is only the top of the iceberg.  Rising non-performing loans ratio in the banking sector are signs that as global financial conditions set to tighten further in the coming two years, Turkey’s banking sector too could as well face problems down the road in terms of requiring fresh equity injections.  Add in the consumer price inflation heading to 18 percent within a couple of months, the Turkish economy is seeking ways to prevent hard landing in a much tougher global backdrop.

Thus, the dire situation in the Turkish economy makes today’s appointments critical.

The new Cabinet members in charge of the economy will either realistically address the pressuring problems and take drastic measures to truly re-balance Turkish economy along with the change of season.  Or they will try to keep the ball rolling until the March 2019 local elections for the sake of political power.  And the latter choice could spell disaster.

We will follow up with an initial evaluation of Erdogan’s new team once the names are announced .

GA.

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