Turkish President Recep Tayyip Erdogan took the oath of office at parliament as Turkey’s first executive president with vast new powers on July 9 and announced a list of names for his new cabinet that caused the currency to crash.

Markets have been in wait and see mode since Erdogan’s election victory on June 24 where he took 52.6% of the vote, hoping that the president would give over the economic management of the country to grown-up hands. However, Erdogan named his son-in-law Berat Albayrak as finance minister, replacing Mehmet Simsek, who was widely seen by investors as one of the few top Turkish politicians who could rein in Erdogan’s “low interest rates at any cost” obsession.

The lira tumbled from 4.55 to 4.73 to the dollar within an hour of the news breaking — falling more than on the eve of the coup attempt against Erdogan two years ago.

The lira has already lost 20% of its value this year and further falls will only put more pressure on Turkey’s heavily indebted corporates.

The story of the lira’s collapse in recent months is not for the faint-hearted. Despite the central bank’s emergency action, the country could still go over the cliff edge and slip into a classic emerging market currency-and-debt crisis. Turkish sovereign bond yields were pushed over 20% in the last week, their highest level since 2008; soaring bond yields are often a precursor of emerging market financial crises.

Turkey is heavily dependent on external borrowing due to its chronic current account deficit. Debt-financed consumption has been the prime feature of the country’s remarkable economic growth achieved during much of the past decade, while the private sector’s share in total external borrowing has been on the rise in recent years. Ukraine and Turkey are two of the “vulnerable three” countries most at risk to US tightening along with Argentina, Fitch said in a note on May 16.

Despite the palpable dangers, Erdogan used his inauguration to reiterate his intension to bring interest rates down. Turkish inflation has soared in recent weeks leading analysts to expect a rate hike at the next central bank policy meeting, but now no one has any idea of what will happen.

Erdogan also nixed the five-year term for the governor of the central bank and appears to have taken over the authority for appointing the next governor from the now greatly diminished parliament.

Erdogan’s inauguration in his new role as executive president marks a turning point for Turkey.

In full control

Erdogan’s June 24 victory, which some argue was marred by irregularities, has left the opposition crushed and in chaos. His main challenger the centre-left main opposition Republican People’s Party’s (CHP’s) presidential candidate Muharrem Ince conceded defeat on the night of the election even though he described the race as “unfair”.

Under the new regime, Erdogan can name the cabinet, draft the budget, appoint top bureaucrats and call elections. He will be able to rule by decrees.

Erdogan has been gradually tightening his grip on power over the years and the oath-taking ceremony on July 9 only formalised Turkey’s switch to the executive presidency that had de facto already occurred.

Before the formal transition process was complete, Turkey had a prime minister and a cabinet, but everybody knew who was calling all the shots.

The presidential system has formally abolished the prime minister post and transferred all the authority of the prime minister’s office to the president.

“As president, I swear upon my honour and integrity, before the great Turkish nation and history, to work with all my power to protect and exalt the glory and honour of the Republic of Turkey and fulfil the duties I have taken on with impartiality," Erdogan said at the ceremony in the parliament. 

The event, however, once again displayed how tense the political climate is and how deeply polarised the country is.

Lawmakers from Erdogan’s Justice and Development Party (AKP) and its ally Nationalist Movement Party (MHP) stood up, as is customary, during Erdogan’s swearing-in, while the opposition CHP, the pro-Kurdish Peoples' Democratic Party (HDP) and Good (IYI) Party lawmakers did not, state-run news service Anadolu reported. 

CHP leader Kemal Kilicdaroglu did not attend the ceremony in the national assembly at all.

Palace ceremony

“At the dawn of this important turning point of our republic and democracy, as the 12th president of Turkey and the first president of the new presidential governmental system, I promise to strengthen our nation’s unity and fraternity, to develop our country and to elevate our state,” Hurriyet Daily News quotes Erdogan as saying when he visited Anitkabir, the mausoleum of Ataturk, the founder of the Republic, after the oath-taking.

A separate grandiose inauguration ceremony was held at Erdogan’s massive presidential complex in the capital Ankara’s Bestepe district with some 10,000 people invited.

Soldiers fired a 101-gun salute as he entered the presidential complex.

The ceremony at the presidential complex was overshadowed by a train accident that killed at lest 24 people in the western province of Tekirdag. A further 300 people were injured in the deadly derailment.

Erdogan’s opponents criticised the flamboyant ceremony that went ahead despite the tragic event in Tekirdag on social media.

Merak Aksener, the leader of the newly founded centre-right, nationalist IYI Party, who challenged Erdogan in the presidential race, called for the cancellation of the ceremony. Her party that formed an election alliance with the CHP sent 43 deputies to parliament. 

Ince also lashed out at Erdogan on social media. “You have money to build palaces, but you do not have money to repair railroads! This derailed mind-set continues to hold grandiose ceremonies,” Ince wrote on Twitter.

In response, the president’s office said the ceremony was scaled down and some acts, such as fireworks and folk dances, were cancelled out of respect for those who lost their lives in the accident.

The presidents of Bulgaria, Georgia, Macedonia, Moldova, Bosnia and Herzegovina, Serbia, Kosovo, Pakistan, Kyrgyzstan, Sudan, Guinea, Zambia, Guinea Bissau, Equatorial Guinea, Somalia, Mauritania, Gabon, Chad, Djibouti, Venezuela and Turkish Republic of Northern Cyprus as well as the Emir of Qatar attended the ceremony at Bestepe.

Russian Prime Minister Dmitry Medvedev, Venezuela’s Nicolás Maduro and Hungarian Prime Minister Viktor Orban were also among the attendees.

The European Union sent its Commissioner for Migration and Home Affairs Dimitris Avramopoulos to Ankara.

New cabinet announced 

On July 9, Erdogan also unveiled his 16-minister cabinet. 

The bottom line: Deputy Prime Minister Mehmet Simsek, Finance Minister Naci Agbal and Economy Minister Nihat Zeybekci are out.

Erdogan picked his replacements from his inner circle, choosing people personally loyal to him over competence.

Erdogan’s son-in-law Berat Albayrak, the energy minister in the previous government, has been appointed as the minister of finance and treasury in a ministry that has an expanded brief and will be in charge of the economy. 

The USD/TRY rate jumped to 4.7 at 11:00pm local time after Erdogan announced the new cabinet from 4.58 at 9:00pm, as investors reacted to the news.

Investors were spooked by an interview Erdogan gave in May, where he make “unchained” comments and laid out his unorthodox theory that cutting interest rates bring inflation down — the opposite of accepted economic theory.

Yigit Bulut, Erdogan’s advisor, wrote on Twitter that: “The appointment of Berat Albayrak is the most important step taken under the new system. As our President has stressed repeatedly taking steps towards fighting inflation will be the best gift to Turkey.”

Market participants were terrified that Erdogan would move to take control of the central bank and implement his ideas. Now they fear the appointment of Albayrak will allow him to do just that and the central bank will lose all independence.

The decree reduced the central bank governor’s role in making appointments to deputy governor posts.

As far as other key appointments are concerned, respected Foreign Minister Mevlut Cavusoglu has retained his post, and is expected to continue his pugnacious policies with the rest of Europe.

Erdogan loyalists Interior Minister Suleyman Soylu and Justice Minister Abdulhamit Gul also kept their posts.

Maybe the most surprising was the appointment of Chief of Staff Gen. Hulusi Akar as the minister of defence.

Ruhsar Pekcan, CEO of a private engineering company, has been appointed trade minister.

Erdogan picked Fuat Oktay, who previously served as the prime ministry undersecretary, as his vice president.

Erdogan named Fahrettin Koca, a doctor to the Erdogan family and chairman of the Medipol Hospital chain, to head health ministry.

He picked the board chairman of one of Turkey’s largest tour operators ETS, Mehmet Ersoy, as tourism minister. 

Investor will not welcome the fact that neither Simsek nor his ally Agbal were offered any role in the new government.

Under a decree issued ahead of Erdogan’s inauguration ceremony in parliament several ministries have been merged leaving a reduced cabinet of 16 ministers.

Accordingly, the Ministry of Finance has been renamed the Ministry of Finance and Treasury. The EU Affairs Ministry has been abolished and merged with the Foreign Ministry. The Ministry of Customs and Trade and the Ministry of Economy have been merged and renamed the Ministry of Trade. 

The Ministry of Science, Industry and Technology and the Ministry of Development have been merged and renamed the Ministry of Trade.