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Economist Timothy Ash: Central Bank independence is vital for Turkey

President Recep Tayyip Erdogan of Turkey named his first cabinet last week under the new constitutional system which sees the powers of the Turkish President greatly enhanced.

Under the first cabinet of the new presidential system, Erdogan appointed former energy minister and Erdogan’s son in-law, Berat Albayrak as a new minister of finance and treasury.

Albayrak will manage economy and financial policy by replacing roles previously held by Deputy Prime Minister Mehmet Simsek. Albayrak is very well known by investors.

Erdogan, told investors in May that he plans to take more control of economic policy and The Center Bank of Republic of Turkey (CBRT) in his new role.

Now investors are considering of independence of CBRT and Albayrak’s management in economy.

“I think central bank independence is really important. You will note that the lira only managed to stabilize over the past month after the central bank took an orthodox approach and raised policy rates. If the CBRT tries to cut rates too early the lira will suffer again. I think it is important that Erdogan let’s the CBRT do its job.” said Timothy Ash who is BlueBay Asset Management’s emerging markets senior sovereign strategist.

Ash, claimed “Turkey is in a delicate position, and extreme care is needed with monetary policy. It’s problems are well known, it faces a weight of short term external debt falling due and a wide current account deficit. This means its external financing needs over the next year are around USD220bn, twice foreign exchange reserves.”

According to Ash, It’s options are quite limited, its needs to either allow the lira to weaken or keep rates high, or a combination of these to slow domestic demand, weaken import demand and cut the size of the current account deficit and thereby the external financing gap.

Ash  also said “This means lower growth in the short term. There are no other options.”

“If Turkey tries an alternative approach – cutting rates too early, and keeping them too low, then the lira will have to adjust more and this could be really destabilizing.” Senior Strategist told Politurco.

Ash “If the lira weakens further I think there would be really concerns over the ability of Turkish entities to pay, and a credit crunch in effect. If foreign banks are unwilling to roll over external liabilities, then Turkey will have little option but to go to the IMF. But it has solutions in its own hands. If it runs a more orthodox policy approach, keeping policy rates higher for longer, than it can survive without the IMF. But this means accepting a little lower growth in the short term.” Ash added.

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