ISTANBUL - Turkish financial markets were thrown into turmoil this month when Prime Minister Ahmet Davutoglu announced he was stepping down. Calm was restored with the selection of the new government, but any market euphoria may prove to be short-lived.
The reappointment of Mehmet Simsek, a former international banker, as deputy prime minister saw the markets recover most of the loses they incurred after Davutoglu's ouster.
Chief economist Inan Demir of the Istanbul-based Finansbank said Simsek’s presence in the new government was seen as a positive gesture by President Recep Tayyip Erdogan to international markets.
"With Mehmet Simsek in the government, they at least think that the government is still trying to, at least to some extent, [keep them] happy. ... But the bottom line is that Mehmet Simsek is unlikely to have a significant room for maneuver."
Simsek has lost his key role of supervising the country’s financial markets, and there are concerns about the future of the strict regulation and supervision of the markets, introduced in cooperation with the World Bank and International Monetary Fund following the country’s financial crisis.
Political consultant Atilla Yesilada of Global Source Partners, a business management consultancy, said Erdogan’s oversight of economic policy would add to the unease.
"Erdogan is already putting his stamp on policies," Yesilada said. "The policy outlines are shaping up. Erdogan said his concerns regarding low interest rates are to be treated with more seriousness, meaning that he wants faster rate cuts. I think we are going to see more mega-projects — essentially, Erdogan runs the country."
Analysts warned that interest rate cuts could threaten the currency, with Turkey having to attract large amounts of foreign capital to finance its trade imbalance.
Ankara is also relying on foreign capital to finance the growing list of large construction projects, including the world’s biggest airport and second-longest suspension bridge.
More projects are predicted, with Erdogan seeking to boost the economy before an expected referendum to extend his presidential powers.
Demir said Erdogan’s plans could depend on whether the U.S. central bank ends its policy of cheap money and raises interest rates.
"Cheap money is such an important factor for Turkey; it can just gloss over the political uncertainties, the turmoil that you might have in noneconomic areas in Turkey," Demir said. "But if the Fed [U.S. central bank] is starting to tighten after having run significant current account deficits, even [with] the most prudent of economic policies, Turkey would suffer. There are many examples in economic history of countries who run large current account deficits and use financing flows to support construction. That does not go on forever."
Some analysts estimate Erdogan’s mega-projects could cost in excess of $50 billion.