Turkey’s re-elected president, Recep Tayyip Erdogan, on June 3 announced his new cabinet. Prior to the occasion, there was firm speculation that Erdogan would restore market favourite Mehmet Simsek as finance minister and that speculation proved correct.

Rumours had also pointed to Erdogan appointing as ministers sons-in-law Berat Albayrak (the older son-in-law, who previously served as energy minister and economy czar) and Selcuk Bayraktar (the younger son-in-law, known for assembling armed drones). However, these rumours turned out to be duds.

Simsek is taking over from treasury and finance minister Nureddin Nebati. Does Erdogan already have a spot of indigestion? Simsek is known for orthodox economics. Erdogan is known for stubbornly telling the world that his brand of unorthodox, or heterodox, economics is the way to go, despite the economic carnage that has mounted up around him in recent years. So when it comes to seeing Simsek in action, how much will Erdogan be able to swallow without a stark loss of face?

“Turkey has no alternative but to return back to rational ground. A rule-based Turkish economy would help us reach long-awaited prosperity,” Simsek said in his first remarks.

Simsek once served as a senior economist at the US Embassy in Ankara and as a chief economist for the CEEMEA region at Merrill Lynch in London. His first stint as Turkey’s finance minister lasted from 2007 to 2015. He then served as Erdogan’s economy czar from 2015 to 2018 as the successor to Ali Babacan.

Right now, a positivity has taken hold in media coverage of Turkey’s economic trajectory. Orthodoxy is in the house. A positive real return is on the way.

Nebati’s predecessor was Lutfi Elvan, who was appointed in November 2020 at the same time that Naci Agbal was made central bank governor. Agbal was fired in March 2021.

Agbal’s four months of orthodoxy ended with drama. He’d been praised for being more “orthodox” than Bartholomew I of Constantinople, but his attempts at restoring some monetary discipline quickly ran up against a presidential dismissal-by-decree. As Turkey entered into new market upheaval, some finance industry figures swore they would never trade Turkey’s papers again. Some cried foul and somehow rescued their money.

“So, it now seems fairly evident that with meetings such as that between Erdogan and [his Egyptian counterpart Abdel Fattah El-] Sisi and actions restricting the freedoms of the opposition that Turkey is moving away from a model closer to that of Western Liberal Market Democracy to one nearer to a model closer to ‘Incumbent Democracy’. We can debate whether we input herein the word market, as in Turkey increasingly FX and interest rate market, and banking, activity is heavily managed in increasingly non-market unorthodox ways,” Timothy Ash at BlueBay Asset Management wrote in November 2022.

* TRT World is Turkey's government-controlled international broadcaster.

Currently, rumours suggest that Hafize Gaye Erkan, a finance industry professional who also served as co-CEO at First Republic Bank in the US, will be appointed as the new central bank governor.

“My bet is that the front page of the FT on Monday [June 5] will be a story about Erdogan appointing the first woman to head the central bank of Turkey—and a secular woman at that. If it happens, this will be a landmark event,” Ash wrote on June 3.

Prior to the latest U-turn in favour of the orthodox, a lira devaluation looked a must. Erdogan was in a position to find some fresh FX supply, but should the unidentified capital flows and “friendly country” channels not work, rate hikes were on the cards.

On May 25, Erdogan essentially said that he would travel to countries where he might successfully beg some more capital.

As things stand, the Erdogan regime is moving to the model where it satisfies its urgent FX needs via hot money. How long the latest honeymoon period of the Erdogan administration and the finance industry lasts will be keenly observed.

All eyes are on the policy rate. It is currently unknown whether Simsek has convinced Erdogan to hike rates. Previously, he was part of the economy team (together with Babacan and then central bank governor Erdem Basci) that observers said pulled the wool over Erdogan’s eyes with the so-called interest rate corridor policy.

The headline policy rate was left unchanged while the central bank pushed banks to borrow at the late liquidity window. It translated into a de facto rate hike.

On June 5, the first reaction of the USD/TRY pair to the new situation with financial policy will be watched. The first signs of developments as regards portfolio flows will be seen.

The question is whether the finance industry will wait for a currency devaluation to take effect or whether front-loaded inflows will shelve a devaluation.

The visible impacts of the overvalued lira on the real economy and the gaping trade deficit suggest a a devaluation is first required. In this case, an ongoing controlled devaluation would continue until the first monetary policy committee (MPC) meeting. Then, a front-loaded rate hike would open the doors for another flood of hot money.

The MPC will hold its next rate-setting meeting on June 22.

In the medium term, Simsek’s moves in relation to the central bank’s deeply negative FX position, the FX-protected deposits scheme (KKM), macroprudential measures and non-capital controls and the banking industry’s heavy burden will be watched and clocked.

Intelligence head becomes foreign minister

The other sensation in the new cabinet line-up is Hakan Fidan, head of the Turkish National Intelligence Organization (MIT) for the past 13 years. The spymaster is the new foreign minister.

The first item on the agenda in foreign policy is Sweden’s bid to join Nato. The bid got caught up in Turkey’s electioneering—Erdogan had to present Turkey as extra-muscular and independent in all international affairs. Since his re-election, the noise has not suggested he will continue to block Sweden’s application to join the military alliance, but this is not yet a done deal. The time has come for a decision. Any more nonsense from Ankara and relations between Turkey and the West could turn rather sour.

The deadline will fall with Nato’s summit in Lithuanian capital Vilnius on July 11-12.

Fidan is known for having conducted relations with Syria from behind the scenes. A normalisation with the Assad regime was prepared. Bashar al-Assad chose to wait for the election outcome. His response is now expected.

Everything else will remain the same. The Erdogan regime will keep on conducting transactional business with everyone, from the US to China.

Other appointments

Army Chief Yasar Guler has been appointed defence minister. What will happen to his predecessor Hulusi Akar is not yet clear.

Fahrettin Koca, owner of Medipol hospital chain, and Mehmet Nuri Ersoy, owner of tour operator Etstur, have kept their posts as health minister and tourism minister, respectively. The rest of the 17-member cabinet were replaced.

Other cabinet members to note are:

Vice President: Cevdet Yilmaz.

Justice Minister: Yilmaz Tunc.

Family and Social Services Minister: Mahinur Ozdemir Goktas.

Labour and Social Security Minister: Vedat Isikhan.

Environment, Urbanisation and Climate Change Minister: Mehmet Ozhaseki.

Energy and Natural Resources Minister: Alparslan Bayraktar.

Youth and Sports Minister: Osman Askin Bak.

Interior Minister: Ali Yerlikaya.

National Education Minister: Yusuf Tekin.

Industry and Technology Minister: Mehmet Fatih Kacir.

Agriculture and Forestry Minister: Ibrahim Yumakli.

Trade Minister: Omer Bolat.

Transport and Infrastructure Minister: Abdulkadir Uraloglu.