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The sudden resignation of Turkey’s central bank chief this month may have been expected to cause investors to worry that the country’s short-lived experiment in financial orthodoxy was over. That the market reaction was so muted shows that the real power to guide the country’s economy now rests with Finance Minister Mehmet Šimšek.
Hafizeh Gey Erkan resigned from the central bank less than a year after taking over, citing a campaign against her in the press. It was a blow to the U.S.-educated Erkan, 44, Turkey’s first female central bank president, who had taken an uncompromising stance on the country’s once erratic monetary policy.
President Recep Tayyip Erdogan appointed Erkan in June last year. With his blessing, she immediately embarked on a campaign to combat chronically high inflation. In total, she raised interest rates by about 36.5 percentage points, a measure that Erdogan had previously denounced as “evil.”
Her resignation briefly felt like a return to the bad old days, when Erdogan would harshly criticize a series of governors who disagreed with his rather unorthodox views on interest rates. He also appointed his poorly qualified son-in-law Berat Albayrak to the post of finance minister. Foreign investors were spooked by the rapid turnover of central bank chiefs since 2016 and their frequent hesitance to raise interest rates in defiance of President Recep Tayyip Erdogan. Türkiye’s national debt and currency continued to plummet to crisis levels. For many people, this country has become truly untouchable.
But unlike previous defense policies, Mr. Erkann’s resignation left little ripples in the market. Part of that is because her successor, former deputy assistant secretary Fatih Callahan, is no slouch herself, with a career that spans the University of Pennsylvania, the New York Federal Reserve and Amazon. Analysts including Goldman Sachs described Elkann as “respected” and said her departure was not due to policy disagreements. It shows potential continuity.
But the real key to the market’s calm tone is the reassuring presence of Mr. Simsek, a former Merrill Lynch banker. He left his 11-year stint as Erdogan’s top business leader under difficult circumstances in 2018, before returning to power. Last year’s election.
Simsek knows that markets are important for Turkey, which needs foreign investors to buy its bonds. The hostile portrayal of evil, conspiratorial foreign investors in the Turkish media has thankfully disappeared. He also knows that if the currency collapses, the people will suffer from further increases in the prices of imported goods. He recognizes the need for continuity in economic policy and, in particular, stabilization of inflation.
The central bank is still far from achieving this goal, with annual inflation still hovering near 65%. Still, fund managers trust Simsek to lead the job and, importantly, keep Erdogan close to his side, re-pumping money into Turkish assets for the first time in years since his reelection. Shows enthusiasm. Mr. Callahan was Mr. Simshek’s pick for the central bank, and that’s enough history for Wall Street analysts and investors.
The situation today is much better than it was five years ago. But it’s still not ideal. The weight on Mr. Simsek’s shoulders is considerable, and it is unhealthy for investors to take on such intense risks as a key player. The presence of widely respected figures at the upper echelons of Turkey’s economic establishment would be highly desirable as evidence that Erdogan’s turn toward orthodoxy is deep-rooted. For now, mutual distrust between the president and Western fund managers remains smoldering. Investors place great trust in Mr. Simsek as the key liaison between the two parties.
