Turkey’s Central Bank chief Hafize Gaye Erkan resigned on February 2nd, 2024 after just 8 months on the job, citing a “defamation campaign” against her following allegations of nepotism and abuse of power. President Recep Tayyip Erdogan swiftly named Deputy Governor Fatih Karahan as her replacement.
Background
Erkan was appointed in June 2023 as part of Erdogan’s proclaimed economic “reset”, which included a commitment to free market rules and central bank independence after a currency crisis saw the lira lose 44% against the dollar in 2021.
Her surprise appointment initially boosted sentiment and the lira rallied over the summer on the back of aggressive rate hikes and orthodox policy settings under Erkan. The central bank raised its benchmark rate by 500 basis points to 19% by September.
However, Erkan came under scrutiny in recent weeks over allegations she secured jobs at the bank for relatives and misused internal bank funds. Political opponents accused her of hypocrisy given her publicly stated commitment to transparency and accountability.
The claims sparked an investigation by Turkish authorities and led to calls for her resignation from opposition lawmakers. Erkan strongly denied any wrongdoing but said she was stepping down to protect herself and her family.
New Central Bank Chief – Fatih Karahan
Fatih Karahan takes over effective immediately, having served as one of Erkan’s deputies since June.
The 39-year old earned a PhD in economics from Brown University and previously held senior economist roles at Amazon and the International Monetary Fund.
In his farewell statement, Karahan said:
“It has been an honor to work alongside Governor Erkan these past months during such a pivotal time for the Turkish economy. I thank her for her leadership and guidance, and her commitment to stabilizing the lira. I will work hard in my new position to continue implementing sound monetary policy for the benefit of all Turkish citizens.”
Erdogan expressed his “full confidence” in Karahan to uphold central bank independence andapplauded his strong academic record:
“Dr Karahan brings world class credentials in economics and finance to this important role. His expertise gives me confidence he has the vision and capability to spearhead our agenda for economic prosperity.”
Lira Uncertainty Returns
The unexpected leadership change has stoked volatility in Turkish asset markets amid uncertainty over whether Karahan will maintain Erkan’s hawkish policy stance.
The lira immediately slipped over 2% against the dollar on news of Erkan’s departure, reversing much of its gains since the start of 2024.
| Date | TRY/USD Rate | % Change |
|---|---|---|
| Jan 1, 2024 | 18.5 | – |
| Feb 2, 2024 | 17.2 | -7.0% |
| Feb 3, 2024 | 17.6 | +2.3% |
Meanwhile stocks tumbled 3% in early trade before paring some losses after Karahan’s appointment. Credit default swaps measuring risk of a Turkey sovereign debt default jumped by the most in three weeks.
The sharp moves reflect investor skepticism over the new Governor’s independence and mandate. Markets now expect pressure to mount for a return to unorthodox policies like rate cuts sooner than previously thought.
Impact on Other Policy Settings
Broader fallout may extend to Turkey’s fiscal stance and currency intervention policy.
With Erkan championing spending restraint and limited market interventions to rebuild foreign exchange reserves, some analysts now expect a shift back towards pro-growth fiscal stimulus and increased state interference in currency markets to cap lira losses.
“Karahan is unlikely to resist political pressure in the same way as his predecessor,” said Selim Akhan, Turkey economist at JPMorgan. “We see a rising probability of earlier than expected rate cuts, looser budget policy, and more aggressive interventions to weaken the dollar and boost exports.”
Any such reversal of recent orthodoxy poses risks to Turkey’s delicate economic recovery with possible capital outflows, higher inflation and further currency volatility.
After a sharp recession in 2023, Turkey returned to growth in Q4 buoyed by robust trade and tourism activity. However, inflation remains extremely high at nearly 60% and risks accelerating again if the lira slides anew.
Outlook
While Karahan’s appointment has injected near-term uncertainty, Turkish assets remain deeply undervalued. Any return to unorthodox policies may be gradual given the economy’s continued fragility.
Erdogan also has a strong political incentive to promote stability in coming months as Turkey heads towards critical parliamentary and presidential elections expected in June 2024.
With polls showing sinking approval ratings amid double digit inflation and elevated unemployment, most analysts expect Erdogan to tolerance continuity at the central bank for now.
“Turks are feeling the economic pain sharply. Erdogan cannot afford to let the lira collapse again if he wants to win,” said Ayse Taskin, EM strategist at Deutsche Bank. She pointed to the president’s concilatory language around Karahan’s appointment as evidence of his restraint for today.
Ultimately Karahan’s true stripes will only become clear once in the job. But hopes remain that institutional checks at the bank and Turkey’s precarious economic fundamentals temper any pivot for now from the policy settings he helped craft as Erkan’s deputy.
Conclusion
The resignation of Turkish Central Bank Governor Hafize Gaye Erkan after nepotism allegations throws into question recent economic gains from orthodox central bank policies. But while new chief Fatih Karahan’s appointment sparked near term volatility and uncertainty, incentives remain against any swift unraveling of recent stabilizing efforts. With Turkey facing elections within months, a cautious approach still appears the most likely path ahead for monetary policy and other key economic reforms.
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