• Deputy PM, cheered by investors, may disappoint after survival
  • Chief Erdogan adviser says officials expected to toe the line

Investors who cheered the survival of Turkish Deputy Premier Mehmet Simsek will probably find he can no longer be a market-friendly counterweight to President Recep Tayyip Erdogan’s economic policies.

Simsek’s inclusion in new Prime Minister Binali Yildirim’s cabinet on Tuesday led to the biggest rally in Turkish stocks this year and transformed the lira from worst-to-first among emerging market currencies within minutes. The former Merrill Lynch strategist is the sole survivor from the team of ruling party officials whose focus on balancing budgets and taming inflation is credited with driving Turkey’s era of rapid growth.

Erdogan has removed those officials one-by-one as the president and his allies push for rate cuts and other policies to stimulate the economy. Simsek’s continued cabinet presence may help the government to prod the central bank into more easing while limiting potential adverse market reaction, according to Finansbank AS economist Deniz Cicek.

“We do not expect Simsek to make a meaningful difference beyond that,” Cicek said in an e-mailed note on Tuesday. “The president’s team will set the direction of the economic policies from now on, and Simsek’s influence on that matter will be limited.”

Rate Conflict

Erdogan has been at loggerheads with the central bank since January 2014, when the bank had to raise its three main interest rates in an emergency meeting to stem a run on the lira. He accused the regulator of slowing economic growth with high borrowing costs, even arguing that Turkey needed to lower interest rates to curb inflation -- in contrast to mainstream economic thinking.

For a piece looking at Simsek’s impact on Turkish economic policy, click here.

The bank has lowered the higher of its three rates by a combined 125 basis points since March, including a reduction of 50 basis points on Tuesday, though it said the cuts were part of a delayed plan to simplify policy rather than to ease access to credit.

With former Prime Minister Ahmet Davutoglu gone, Erdogan finally has a compliant premier who has pledged to boost the authority of the presidency. Analysts predict Simsek and other officials not fully on board with the president’s thinking will be frozen out.

“Simsek’s ability to deliver structural reforms will remain minimal as he lacks leverage,” Wolfango Piccoli, co-president of Teneo Intelligence in London, said in a May 24 report. “Even more crucially, fundamental decisions will be taken and policies designed by Erdogan and his close circle of advisers.”

Erdoganomics

Cemil Ertem, a chief presidential adviser, said the new government’s strategy will be in line with Erdogan’s economic vision, dubbed Erdoganomics by Barclay’s Durukal Gun in a May 20 report. Ministries will prioritize expansion while policy makers should ignore advice from overseas bodies including the International Monetary Fund and credit rating agencies about the risks of rapid growth such as higher inflation and a wider current account deficit, Ertem said in an interview with state broadcaster TRT.

“Turkey will introduce its very own, unique policy solutions instead of listening to warnings coming from outside,” Ertem said, without giving details. “This government will shift Turkey’s economic framework from one based on interest rates to one that relies on production.”

Others see a more prominent role for Simsek following the leadership reshuffle. Simsek has always enjoyed Erdogan’s strong backing and may gain greater access following the exit of a hands-on premier, said a person familiar with the matter who asked not to be named because of the sensitivity of the subject.

Erdogan sees the value of having a “different message for different audiences” and also wants to keep hold of the political center ground, said Tim Ash, head of emerging-market strategy at Nomura International Plc in London.

‘Loyalty’

“Simsek had already shown his loyalty, and perhaps also ambition, by failing to follow Davutoglu,” Ash said in an e-mail. “While Erdogan, and some of his advisers, might make a lot of noise about unorthodox economics, I think they do recognize the importance of anchoring financial markets.”

The opposite will be true, according to Piotr Matys, a strategist for emerging-market currencies at Rabobank in London. The new government will push populist policies to boost growth that Simsek will be powerless to reverse, he said by e-mail.

“It is positive that Simsek remains, but it doesn’t change the fact that reformists like him seem to be sidelined,” Matys said.

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