Changing the Guard

Sureyya Serdengecti will be remembered for the tight fiscal approach that brought the Turkish economy to its present position of strength. However, even before his five-year term as Turkish Central Bank governor came to an end in mid-March and economists lined up to applaud his achievements, attention had turned to the man expected to slip into his shoes, the bank's deputy governor, Erdem Basci. Investors are nervously eyeing Basci's as yet unconfirmed appointment.



Though nominated by the government, and already acting in the position, Basci's appointment still needs to be ratified by President Ahmet Sezer.



"The name has been submitted to the president, and it is highly likely that he will be appointed, but there is not absolute certainty at this point in time," Hakan Aklar, assistant manager of research at AK Securities told OBG.



Any delay in the decision should not be cause for alarm, with the president having two weeks before coming to a decision on whether to give the green light to the government's choice.



On paper, Serdengecti's nominated successor is armed with the expertise and judgement to maintain the positive dynamic registered in the Turkish economy over the last year, having worked as a lecturer at Bilkent University's Department of Economics for eight years before joining the central bank. Having someone assume the position who not only has an insider's view on monetary matters but also executive experience on the workings of the central bank offers its own set of advantages.



While Basci's strong credentials make him a natural choice for the top seat, observers on the other hand flag his relative youth, 40, as a point to consider. The fact that he is considered to be close to Ali Babacan, Turkey's minister of state responsible for the economy, has also drawn attention. The deputy governor advised Babacan following the Justice and Development Party's (AKP) November 2002 election victory. This is not to suggest that Basci is under the thumb of the government. Maintaining the independence of the central bank remains a key to continued market confidence - a fact that both the AKP and the central bank are more than aware of.



Despite this, there is speculation that the reason Serdengecti did not have his term renewed was precisely because of differences with the government over monetary policy and in particular the strength of the Turkish lira, which has upset local exporters. Analysts believe the government is looking for a somewhat more malleable governor of the central bank, though not a "yes" man.



"The new governor will be expected to hold firm against government criticism and to avoid taking populist stances," says Ozgur Altug, chief economist at stock brokers Raymond James.



Recent statements from the nominee bode well in this regard. Speaking on March 15 at his first press conference since being named as acting governor, Basci promised more of the same from the central bank.



"Our monetary policy will continue in line with the General Framework for Inflation Targeting document, announced in December 2005, and the 2006 Monetary and Foreign Exchange Policy document," Basci said. "The central bank has announced its inflation target, and we're focusing on reaching those targets."



This policy stance is hardly surprising either. "There is not much room for loose monetary policy with the IMF programme. And the market would respond negatively if a slack approach were taken," Aklar said.



However, members of the business community and economists alike are already nervous about global liquidity conditions. Uncertainty over the appointment of the new governor, along with fears of higher interest rates in the US and the global sell-off of emerging market assets that followed, was felt in the Istanbul Stock Exchange (IMKB) in March. The IMKB index fell 3.25% on March 15 alone, the day after Basci was nominated. The decision last week by the Bank of Japan to tighten its belt and end its more flexible monetary policy has hardly helped, exacerbating the squeeze on emerging markets around the world.



Turkish economists are concerned about what an outflow of liquidity might imply for the country's sizeable current account deficit, an estimated $21bn for 2005. The over-valued lira has certainly been a headache for Turkey's export-orientated manufacturers, who are increasingly frustrated by the strength of the currency. Critics meanwhile claim that the bank's cuts in interest rates have not kept apace with falling inflation, which came in at 7.7% last year and is tipped by some to 5.2% by year-end 2006. Despite the flak, the central bank remains determined not to trigger inflation by cutting interest rates too sharply, having already made adjustments on nine occasions in 2005.



Little wonder then that observers await Basci's confirmation to assume the top seat at the central bank. Nevertheless, the governor is but one - albeit the most important - of seven members on the bank's Monetary Policy Committee that makes decisions on Turkey's fiscal policies. A majority vote, including that of the governor, is required for any final decision. These, however, may not prove to be easy in the coming weeks.