Turkey needs to sustain path to economic orthodoxy, EBRD says
Turkey needs to push on with a transition to orthodoxy under its new economic team, said Roger Kelly, a regional economist for the European Bank for Reconstruction and Development (EBRD).
Kelly said changes to Turkey’s economic management last month were welcomed by investors, as were a subsequent rate hike by the central bank and promises of transparency in policymaking.
“First of all, the return to orthodoxy needs to be sustained," he said in an interview with Turkey’s state-run Anadolu news agency on Monday.
Investors now expect the central bank to keep interest rates high for a sustained period to tackle inflation, he said.
"To support this, reforms to help shift Turkey away from its dependence on credit-fuelled consumption towards a more sustainable growth model will be expected," he said.
Turkish President Recep Tayyip Erdoğan sacked and replaced the chief of the central bank in early November, bringing in former finance minister Naci Ağbal. The central bank hiked interest rates to 15 percent from 10.25 percent two weeks later to rein in inflation of 11.9 percent. Erdoğan also appointed ex-deputy prime minister Lütfi Elvan as treasury and finance minister to replace his son-in-law, Berat Albayrak, who resigned on Nov. 8.
Turkey saw significant foreign investor outflows this year due to a deterioration in sentiment, Kelly said. Now stability in the lira, which has lost about a quarter of its value this year, will be key to attracting foreign capital back to the country, he said.
“Turkish assets offer one of the highest carries in the emerging markets, but of course the carry trade depends on exchange rate stability,” Kelly said.
“A more stable lira associated with the return to policy orthodoxy should put Turkey in a strong position to attract investors looking for yield in a vast liquidity environment."