Investor favourite Mehmet Şimşek set to return as Turkish finance minister

Turkish president Recep Tayyip Erdoğan is set to appoint Mehmet Şimşek as finance and treasury minister, according to a person familiar with the negotiations, a move that would bring back to the government an economist who is widely respected by foreign investors.

Şimşek, a former Merrill Lynch economist who was previously deputy prime minister and finance minister, would be re-entering government at a time when Turkey’s $900bn economy is under intense strain and foreign investors have fled after years of unconventional policies pursued by Erdoğan’s government.

If Şimşek is appointed, it would be a signal that Erdoğan may be willing to change course on his unorthodox economics, which many blame for triggering an acute cost of living crisis and sending the lira to record lows.

Şimşek, who exited Turkey’s government in 2018 when Erdoğan appointed his son-in-law Berat Albayrak as finance minister, has found common ground with the president on key policy matters, according to the person familiar with the talks.

Tim Ash, emerging markets strategist at BlueBay Asset Management, said that if Şimşek was appointed it would mean “that the Turkish economy has a chance of pulling back from the brink.”

The former London-based Merrill head of Emea fixed income strategy subscribes to conventional economic theories, something that clashes with Erdoğan’s long-held view that high interest rates cause rather than cure high inflation. It is expected that Şimşek, 56, would push for a return to traditional monetary policies, including higher borrowing costs, assuming he returns to a leading position in Turkey’s economic management team.

The lira barely budged on Friday, trading at a record low of nearly 21 against the US dollar, leaving it down about 22 per cent this year. It was trading at below 5 when Şimşek left office in 2018.

Erdoğan, who was re-elected for a five-year term as president last weekend, is expected to unveil his cabinet on Saturday. Turkey’s government declined to comment on the news that Şimşek was set to be appointed as finance minister, which was first reported by Bloomberg.

Erdoğan is on his fourth central bank governor since Şimşek’s departure as the president has pushed the central bank to lower its main rate from a high of 24 per cent in 2018 to the current level of 8.5 per cent. With inflation running above 40 per cent, “real” interest rates are deeply in negative territory, sending foreign capital fleeing.

Foreign holdings of Turkey’s local currency bonds and stocks are near a record lows, while the cost to protect against a Turkish debt default has leapt higher since Erdoğan came out ahead in the first round of elections on May 14 and then clinched the run-off two weeks later.

Line chart of $bn showing Funds stored in Turkey’s FX protected savings accounts rises

Şimşek, if appointed, will face a series of major challenges in order to restore confidence among foreign investors and place the economy back on to steadier footing.

The county has burnt through $26bn in foreign currency reserves this year as it attempts to prop up the lira and funds a wide current account deficit. Erdoğan said just before the election that unnamed Gulf countries had stepped in to help replenish Turkey’s funding, but many economists worry about the pace at which the country’s war chest is being depleted.

Şimşek would also need to decide whether to keep in place policies put in place under a “lirisation strategy” pursued by current finance minister Nureddin Nebati to cut down on foreign currency holdings of consumers and businesses.

A centrepiece of this plan was the 2021 launch of special savings accounts that protect against lira depreciation, which now hold the equivalent of $125bn. These accounts are becoming an increasing concern among economists because they provide another link between government finances and the lira. While the accounts have helped slow the lira’s fall, they have already cost the government $4bn.

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