New cabinet ministers will be clues for economic reforms

New data on industry production required a downward revision of third quarter growth estimates. Economists started to revise downward even the recently revised 3 percent growth figure.   

These figures once more highlight the necessity to urgently implement the required economic reforms to re-increase Turkey’s production capacity. It is expected the new government will immediately implement economic reforms and step into action to increase sustainable growth capacity. The business world, after the elections, has also started loudly voicing its demands.

It is definite that there are a couple of obstacles on the way before implementing the necessary reforms. The first one is the conjuncture. With the U.S.’ Federal Reserve’s (Fed) rate increases in December, in Turkey, as in other emerging countries, a capital outflow is expected. The Turkish Central Bank is expected to start rate increases following the Fed. However, at this point, it is wondered whether the president in particular will approve of the necessary rate increase and whether there will be a new debate on the rate increase. It will also be discussed to what levels the foreign exchange rates will climb if there is no rate increase and if so, whether or not this will create an obstacle for the industry onset.  

The other obstacle ahead of the reforms, as in the rate increase debate, is the danger of President Erdoğan and his close aides insisting on economic policies that draw the reaction of markets. For instance, will the resources that will become scarce in the next term be poured into major infrastructure projects and the housing sector again or will they be used for structural measures for restructuring of the industry? If the already scarce resources, as in recent years, are channeled into unproductive fields again, this will block the industry leap and thus the reforms. 

What needs to be done

What needs to be done is apparent; there has to be a change made in the current growth dynamics, technology and products with high added values should be prioritized and resources should be allocated. Everybody sees that this is the only remedy for a high and stable growth again. However, there are certain wheels turning and it cannot be estimated how much resistance will come against these necessary changes. 

At this stage, the eyes of the markets are on the new cabinet list that will be announced soon. There is the expectation that Erdoğan will interfere with the list or, more precisely, he will appoint the names he wants as ministers to a great extent. 

At this point, the positions on the new cabinet of economy have become much more important, particularly Ali Babacan and Mehmet Şimşek who the markets have developed a trust in. Markets and foreign investors may develop trust again that a reform process will restart in the economy if these names are on the economy management. On the other hand, in the case that certain people are appointed to the economy management just because they are close to Erdoğan, then it might be quite difficult to convince the markets. 

In short, it is a must that a new reform period should start in the economy and the names to be appointed to the new cabinet will give the first signs to the market on the topic of reforms.