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Türkiye’s Treasury and Finance Minister Mehmet Simsek and the central bank governor Fatih Karahan were on a roadshow in the U.K. over the past week. Both are excellent communicators, and it’s fair to say they have built a strong rapport and credibility in the eyes of the international investor community.
Both have been part of a team that has implemented significant and painful economic adjustments since the Simsek-led team took office in May 2023, following President Recep Tayyip Erdogan’s surprise general election victory. Monetary policy took a 180-degree turn, as compared to the unorthodox approach pursued for roughly a decade. In the run-up to these elections, there was a period that saw the lira become a perennial weak currency, and inflation as a result hit a high of 80%.
Simsek and his crew went against expectations and hiked policy rates to 50%, while simplifying the monetary policy regime. Fiscal policy was tightened from a 5%-6% deficit in the immediate aftermath of the 2023 earthquake to just 3% in 2025. The huge contingent risks from the protected foreign exchange (FX) deposit scheme, the KKM, were cut from over $140 billion, over 10% of gross domestic product (GDP), to a few billion dollars now, and are being completely wound down. The lira was stabilized, and inflation has fallen to almost 30% while FX reserves have risen to record highs of nearly $200 billion, providing well over a year’s reserve adequacy cover, a key IMF risk matrix. The current account deficit has remained contained below 3% of GDP, despite a sharp real appreciation of the lira and complaints now of overappreciation and a loss of competitiveness from vocal and labor-intensive sectors such as textiles.
Simsek managed to stabilize the macro against the odds and avoid a systemic crisis, which seemed inevitable in the aftermath of the 2023 elections. That this was achieved without an external support anchor—no IMF or perhaps big Gulf bailout—and with only a minor sacrifice in growth is quite extraordinary, and can perhaps be partly explained by the positive credibility shock impacted by Simsek and his team and the policies he rolled out.
First, concerns remain as to the durability of Simsek’s position. Erdogan had a penchant prior to Simsek’s appointment to remove finance ministers and central bank governors almost at a whim—indeed, Türkiye has suffered from seven central bank governors and five finance ministers over the past decade. The concern is that Erdogan could again tire of Simsek’s orthodox economic policies as the date of the next election approaches, perhaps changing the team again and going back to the prior unorthodox pro-growth policies.
Never say never, but this is unlikely as long as Simsek continues to deliver on what most Turks would see as the number one problem in Türkiye, inflation. That was the clear message from the Justice and Development Party's (AK Party) poor performance in the 2024 local election campaign. It would also seem that the economic policy team around Erdogan has changed—a clear out of the unorthodox thinkers in the presidential palace and close family, which means Simsek now has strong backing in the palace. Simsek is delivering Erdogan macro stability, with only a limited growth give up and a steady moderation in inflation and now interest rates. With some time to go until the next elections—likely later in 2027, Simsek’s place seems pretty secure (famous last words). Simsek’s success in delivering a much lower fiscal deficit, with public sector debt to GDP ratio below 30%, gives Erdogan fiscal space as he eventually turns his attention to an election campaign.
Second, it seems on the inflation front, the foreign institutional investor community would criticize Simsek and the central bank team as not being ambitious enough in fighting inflation, for cutting policy rates too early and by too much in 2025, and ongoing into 2026. This argument is that after a decade of high inflation, inflation remains sticky and entrenched, and without significant growth sacrifice, the back of inflation is not truly being broken—even when an opportunity presented itself with the political machinations earlier in 2025. The arrest of former Istanbul Mayor Ekrem Imamoglu forced the central bank to hike policy rates, and given the political imperative at the time to maintain macro stability in the face of political volatility, that could have been an opportunity to stick longer with tighter monetary policy sufficient to bring a more meaningful moderation in inflation—to further break the back of inflationary expectations and inertia.
Simsek and the doves at the central bank would argue that the economy was hit by some unfavourable shocks in 2025 that elevated inflation but have now created a favorable base for the year ahead. In particular, early-year frosts and droughts drove up food price inflation, while services inflation was lifted by the removal of price distortions in education and housing, which are now normalizing. This could be true, and inflation data over the past couple of months has shown some room for optimism. If Simsek and the central bank are right, then this could help portfolio inflows into Türkiye Government Bonds, looking for duration trades.
Meanwhile, the overall positive market narrative around Türkiye could be further helped by geopolitical wins for Erdogan in Syria, relations with the Trump administration (progress on the F16, F35 and S-400 issues, and Gaza), in addition to improved relations with Europe which might seek close defense and security ties with Türkiye in response to on-going Russian expansion as reflected in the war in Ukraine, and an uncertain U.S. security backstop in the light of developments in Ukraine, and now Greenland.
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