Economy administration relieved markets, now it's time to perform

The 62nd government formed under the leadership of Ahmet Davutoğlu has shared its duties and announced its program. It is evident that there will not be much difference politically and economically from previous Justice and Development Party (AKP) governments.

Markets are relieved that there was no change with regards to the economic perspective and the administrative staff. It welcomed that ministers Ali Babacan and Mehmet Şimşek kept their positions in the Cabinet; then, with the distribution of tasks on Sept. 1 and with no changes made to Babacan’s duties, it was also confirmed that he will continue as the boss of the economy.

With the government program read the same day, it was observed that Babacan’s signature was at its economic leg. It was claimed that the phrase the “floating rate will continue” was taken out of the text by President Recep Tayyip Erdoğan before the program was read, but it came out to be untrue. Thus, no phrase that would upset the markets was in the program.

In the program’s monetary and finance sections, it was welcomed that it was stated that priority would be given to balancing the domestic and external demand and also a strong emphasis on the fight against inflation was included. Meanwhile, there was also strong emphasis on the independence of the Central Bank, an issue that has been frequently discussed lately. This and the fact that growth would be protected while the monetary program was applied were factors confirming that there would not be any dangerous change in the economic mentality.  

In the global course, a very tough period is ahead of us regarding developing countries like us and the presence of a proven economic administration is a serious factor relieving the markets; because markets trust the economy management in the sense that in emergency situations, instead of acting ideologically, they would do what is required as they did in the past.

However, this can only be regarded as a pre-condition for any success in the economy during the coming term. Whether or not Babacan will be able to protect the administrators at the Central Bank and other independent establishments he wants to protect will be a serious test for success in the next term. If people who are close to the party who would definitely act ideologically are brought to those positions in place of the current administrators, then confidence erosion will be experienced.

One of the most important keys to success, maintaining fiscal discipline, was mentioned in the economic program. However, there is a new prime minister now and the general elections to be held in June 2015 are very important for the prime minister, as well as Erdoğan. We will be able to see whether or not this pressure will be effective on the economy administration as the elections come nearer. In other words, in the case of adopting populist practices for the sake of votes and in the case the fiscal discipline disappears for this reason, when combined with the tough global course, the probability of endangering economic stability should not be disregarded.

It is also true that a drop in the international credit rating in this period will cause a serious negative effect on the economy. In short, the economy administration generated confidence to the markets at a time prior to a troubled term, but this may not be enough.