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Turkish New Economic Plan Post-Election

The Turkish economy has been facing a multitude of challenges in the post-election period. The lira has been performing poorly, inflation rates are high, and regional disparities still exist. However, the new finance minister, Mehmet Simsek, has come forward with a plan, and President Erdogan has announced his economic policies for 2023. The country’s future growth and stability are looking more promising post-election, but challenges still persist, such as inflation, the current account deficit, and borrowing.

What is the current state of the Turkish economy post-election?

How has the lira been performing?

The lira has been performing poorly in recent years, reaching a record low in May 2021, losing 24 years’ worth of its value. This has caused a lot of turbulence in the Turkish economy, and the government has been taking steps to stabilize the currency but the options are dwindling.  We expect a return to normal policies post-elections.

What are the challenges that the Turkish economy is facing?

The Turkish economy still has regional disparities in terms of economic growth, and the country is still facing high inflation and a current account deficit. Another challenge is to manage soaring inflation and borrowing while maintaining stability.

Who is the new finance minister and what is his plan?

Mehmet Simsek is the new finance minister in Turkey. We expect his appointment to bring “predictable and moderate” economic growth to the country. He aims to reduce inflation to single digits and return the economy to a rational ground. His plan aims for stability for sustainable high growth. The question what kind of argreement did he negotiate with Erdogan in terms control of reforming the economy. More importantly, Erdogan probably has retained either directly or implictly the right to prioritize political goals over economic goals in the future. Thus, we should not expect this agreement to be fixed but with some type of flexibility and subject to change in the future.

What needs to be done?

The economic policies must bring back investment and that will require a return to orthodox economic policies. First of all like increasing interest rates to snuff out inflation and inflation expectations. This has to be part of the deal to bring back Mehmet Simsek. The plan in general has to promote price stability, higher growth rates, and a stable currency.

What is the role of the central bank and its monetary policy?

The central bank plays a crucial role in managing the Turkish economy. Its monetary policy focuses on maintaining price stability and ensuring the stability of the financial markets. Many economists believe that the central bank should be allowed to operate independently without political interference to maintain the stability of the Turkish economy. This has not been the case, thus the current policy of reducing interest rates in an increasing inflation environment.

Our Forecast and Expectation for an Economic Turnaround

We see the move of replacing the Economic Minister with Mehmet Simsek as positive but the question remains how much power Erdogan is willing to give up on the economic front. The test will be what happens to interest rates and the relative independence of the central bank. If interest rates are raised and policies of the central bank return to orthodox economic thinking, then this move is more than just window-dressing.

The options market sees the risk to the downside with put options at a higher volatility than current call options when we examine the TUR ETF. Overall, volatility on the options has gone down post-election with the uncertainty removed. The TUR ETF has been volatile with price jumps on a day to day basis in response to the news.

Thus the option market is just reflecting the huge challenges awaiting the Turkish economy post-election. In short, it will be a difficult road ahead, but in our opinion bringing back Mehmet Simsek is a positive step. Even if interest rates are initially raised (which we expect) to bring back some sort of credibility, the real test is consistency of policy.