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Can market veteran Simsek pull Turkey’s economy back from brink?

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Mehmet Simsek, a former Turkish finance chief popular among foreign investors, has taken the helm of the economy again, signalling a return to more orthodox economic policies.

The United Kingdom-educated Simsek, a former strategist at London-based Merrill Lynch, was appointed treasury and finance minister on Saturday as Turkish President Recep Tayyip Erdogan announced his new cabinet after winning the May 28 presidential run-off that extended his rule for five more years and into a third decade.

Turkey is in the midst of a cost-of-living crisis stemming from soaring inflation, which peaked at 85.5 percent in October compared with a year ago before easing to 43.7 percent in April with a favourable base effect.

Analysts largely blame the crisis on Erdogan’s unorthodox economic strategy of low interest rates and credit expansion with increasing state control on financial markets that the government says it pursued to push investments, production, exports and growth.

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The Turkish lira has lost some 150 percent of its value in the last two years as the country’s $900bn economy came under immense pressure amid depleted foreign reserves, a swiftly increasing current account deficit, and a snowballing state-backed scheme of lira deposits protected against the currency’s depreciation.

The lira lost about 23 percent of its value since the beginning of this year and stood at a record low of nearly 21 against the United States dollar on Sunday.

‘Transparency, consistency, predictability’

Simsek, 56, who was finance minister between 2009 and 2015 and then deputy prime minister until July 2018, is a market-friendly figure known to foreign investors as an advocate of conventional economic policies, transparency and an independent central bank.

He said during a handover ceremony on Sunday that the country “has no other choice than to return to a rational ground” and that a “rules-based, predictable Turkish economy will be the key to achieving the desired prosperity”.

“Transparency, consistency, predictability and compliance with international norms will be our basic principles in achieving this goal,” he said, adding that among the main targets was “establishing fiscal discipline and ensuring price stability for sustainable high growth”.

Seref Oguz, a senior economist and columnist, said the negotiations between Simsek and Erdogan for the position took a long time because the former wanted to secure his conditions before accepting.

“Simsek put forward three conditions to get on board with the position,” Oguz told Al Jazeera.

The first condition, according to Oguz, was the authority to make his own decisions. The second was to be able to design the country’s economy teams, and the third was for him to be given adequate time to fix the economy’s problems.

Local and international media started reporting about talks over Simsek’s possible reappointment before the first round of the presidential elections on May 14.

After none of the candidates failed to secure more than 50 percent of votes for an outright victory, media close to the government intensified its reporting on a likely nod for Simsek provided Erdogan remained in power.

Addressing his supporters after his election victory on May 28, Erdogan said that he would have “internationally reputed finance management”, in an apparent reference to his former minister.

Hence, foreign investors already knew that Simsek’s appointment was highly probable before Saturday’s announcement.

Erdogan named Cevdet Yilmaz – another cabinet member who backs orthodox economic policies – as Turkey’s vice president.

Simsek said on Sunday that the government’s main purpose is to increase social welfare in Turkey.

Tackling inflation

Ceyhun Elgin, a professor of economics at Istanbul’s Bogazici University, said Simsek is expected to pursue a monetary policy aiming for low inflation rather than credit expansion and growth.

“This means there will be higher policy interest rates to fight inflation,” he told Al Jazeera.

Elgin added that the new minister would not abolish the lira deposits scheme protected against foreign currencies amid depleted foreign currency reserves, but that he might do so “after Turkey’s foreign reserves reach a certain level with the influence of increasing interest rates”.

The indirect state controls on the lira’s exchange rate against foreign reserve currencies are expected to be gradually lifted, Elgin said, leading to controlled depreciation of Turkey’s currency.

Erdogan is known for his belief that high interest rates are the cause of high inflation, not the cure for it.

“Interest and inflation are directly proportional. Interest is the cause, inflation is the effect. There may be people who do not believe this, but this is what I believe,” the president said earlier this year.

Simsek said that it was vital for Turkey “to reduce inflation to single digits again in the medium term … and to speed up the structural transformation which will reduce the current account deficit”.

Turkey’s central bank, the independence of which is seen to have eroded over time, has cut its policy rate to 8.5 percent from 19 percent since late 2021 because of Erdogan’s economic views.

The lira deposit scheme protected against the currency’s depreciation was launched in 2021 in an attempt to keep the lira valuable. It now holds the equivalent of about $125bn.

Erdogan has also followed a policy of credit expansion, at times utilising public banks to provide loans with extremely low borrowing costs, which skyrocketed purchases of properties and cars among other consumption in the last few years.

Oguz said Simsek’s name and appointment are important for Turkey to attract foreign investment, but that investors will want to see the autonomy and authority of the new finance chief.

“Therefore, the first 100 days of Simsek are crucial, in which we will see what authorities he will be able to use, and how he will oversee or change the economy-related positions, including the chief of the central bank,” Oguz said.

He added: “The investors will, in particular, watch the actions that will be taken on the interest rates and lira’s exchange rate, which was kept valuable up until now, but is slowly being released to depreciate against the dollar.”

 

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Bank of Canada walking a ‘tightrope’ as analysts forecast inflation jump in February

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Economists expect inflation reaccelerated to 3.1% in February

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People banking on an interest rate cut may not like the direction Canadian inflation is heading if analyst expectations prove correct.

Bloomberg analysts expect inflation to reaccelerate to 3.1 per cent in February when Statistics Canada releases its latest consumer price index (CPI) data on Tuesday, following a slowdown to 2.9 per cent year over year in January.

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Article contentCPI core-trim and core-median, the measures the Bank of Canada is most focused on, are forecast to come in unchanged from the previous month at 3.3 per cent and 3.4 per cent, respectively.

Policymakers made it clear when they held interest rates on March 6 that inflation remained too widespread and persistent for them to begin cutting.

Here’s what economists are saying about tomorrow’s inflation numbers and what they mean for interest rates.

‘Can’t afford missteps’: Desjardins Financial

The Bank of Canada’s preferred measures “have become biased,” Royce Mendes, managing director and head of macro strategy, and Tiago Figueiredo, macro strategist, at Desjardins Financial, said in a note on March 18, “likely overestimating the true underlying inflation rate.”

They estimated the central bank’s preferred measures of core-trim and core-median inflation are overemphasizing items in the CPI basket of goods whose prices are rising more than five per cent. After adjusting for the “biases,” they estimate the bank’s measures are more in the neighbourhood of three per cent — which is at the top of the bank’s inflation target range of one to three per cent.

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Article content“If the Bank of Canada ignores our findings, officials risk leaving monetary policy restrictive for too long, inflicting unnecessary pain on households and businesses,” they said.

Markets have significantly scaled back their rate-cut expectations based on the central bank’s previous comments. Royce and Figueiredo are now calling for a first cut in June and three cuts of 25 basis points for the year.

“Given the tightrope Canadian central bankers are walking, they can’t afford any missteps,” they said.

‘Inflict too much damage’: National Bank

The danger exists that interest rates could end up hurting Canada’s economy more than intended, Matthieu Arseneau, Jocelyn Paquet and Daren King, economists at National Bank of Canada, said in a note.

“As the Bank of Canada’s latest communications have focused on inflation resilience rather than signs of weak growth, there is a risk that it will inflict too much damage on the economy by maintaining an overly restrictive monetary policy,” they said.

They argue there is already plenty of evidence pointing to the economy’s decline, including slowing gross domestic product per capita, which has fallen for six straight quarters. The jobs market is also on the fritz with the private sector having generated almost no new positions since June 2023, they added.

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Article content“Moreover, business survey data do not point to any improvement in this area over the next few months, with a significant proportion of companies reporting falling sales and a return to normal in the proportion of companies experiencing labour shortages,” the economists said.

Despite all these signs of weakness, inflation is stalling, they said, adding it is being overly influenced by historic population growth and the impact of housing and mortgage-interest costs.

The trio expect very tepid growth for 2024 of 0.3 per cent.

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Rising gas prices: RBC Economics

Higher energy prices likely boosted the main year-over-year inflation figure to 3.1 per cent in February, Royal Bank of Canada economists Carrie Freestone and Claire Fan said in a note.

Gasoline prices rose almost four per cent in February from the month before. But the pair believe a weakened Canadian economy and slumping consumer spending mean “price pressures in Canada are more likely to keep easing and narrowing (to fewer items in the CPI basket of goods).

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China Growth Beats Estimates, Adding Signs Economy Gained Traction With Stimulus

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China’s strong factory output and investment growth at the start of the year raised doubts over how soon policymakers will step up support still needed to boost demand and reach an ambitious growth target.

Industrial output rose 7% in January-February from the same period a year earlier, the National Bureau of Statistics said Monday, the fastest in two years and significantly exceeding estimates. Growth in fixed-asset investment accelerated to 4.2%, strongest since April. Retail sales increased 5.5%, roughly in line with projections.

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China’s retail and industrial data lifts economy, but real estate drags

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Image for article titled China’s new retail and industrial data beat expectations — but signs still point to trouble ahead

 

 

Photo: Florence Lo (Reuters)

 

 

Official economic data out of China for the January and February period came in better than expected. Industrial output rose 7%, higher than the 5% forecast by economists in a Reuters poll, and sped up from the 6.8% growth in December, according to data published Monday by the National Bureau of Statistics.

Meanwhile, retail sales grew 5.5%, better than the 5.2% predicted by analysts but slowed from the previous period’s 7.4%.

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Still, the country’s troubled real estate sector continues to weigh on the economy: Investment in property development fell 9%. Commercial real estate sales are also down double-digit percentages.

“The national economy maintained the momentum of recovery and growth and got off to a stable start,” the statistics office said in its release. Beijing typically releases combined data for January and February to smooth over distortions caused by the Lunar New Year holidays.

China’s shaky domestic demand

Clouding the strong numbers from Monday’s data release are the persistent signs of weak domestic demand in China. New bank lending in China fell more than expected in February, according to Reuters calculations based on People’s Bank of China data.

Total outstanding yuan loans grew by 9.7% last month, a record low in data going back to 2003, according to Bloomberg. The sluggish borrowing demand comes even as the Chinese central bank made a surprise cut in the amount of cash that banks must hold in reserve, suggesting the stimulus measure has had little impact. And Beijing’s exhortations for unleashing “new quality productivity” (also translated as “new quality productive forces”) remains more rhetorical than substantive, particularly absent deeper structural reforms to the country’s economy.

With shaky demand at home, China’s bid to hit a GDP growth target of 5% this year will likely mean leaning heavily on its export machine. But that gambit will also face hurdles as governments, including the EU and Brazil, launch probes into China’s allegedly unfair trade practices. Separately, the U.S. is considering whether to investigate Chinese shipbuilding following a petition from major American labor unions.

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