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Turkish President Recep Tayyip Erdogan wooed sceptical investors Wednesday with a promise of painful reforms, throwing his full support behind a new economic team installed after his powerful son-in-law quit.
In remarks that saw the Turkish lira gain more than three percent against the dollar, Erdogan told parliament he was prepared to “make sacrifices and swallow a bitter pill” to revive the sagging economy.
He vowed to implement “uncompromising structural reforms” and to organise international meetings that could get shrinking foreign direct investments back on track.
Turkey’s main banking index shot up by eight percent on Erdogan’s remarks.
“Markets absolutely loving Erdogan’s U-turn this morning,” BlueBay Asset Management economist Timothy Ash remarked, calling Erdogan’s 21-minute address “too good to be true”.
Erdogan surprised the markets Monday by accepting the resignation of ex-finance minister Berat Albayrak, who is married to the president’s eldest daughter Esra.
Albayrak was replaced by Lutfi Elvan, a technocrat known to investors who was welcomed by economists who have roundly criticised Erdogan’s past economic teams.
Erdogan also named a market-friendly former finance minister, Naci Agbal, as the new head of the central bank — a choice that Albayrak had reportedly resisted.
The country’s currency dipped below eight lira to the dollar Wednesday after trading at around 8.5 last week, a historic record.
Erdogan said the market’s warm reception of his new economic team “indicates that we are on the right track”.
Economists attribute some of Turkey’s problems to Erdogan’s belief that higher interests rates cause inflation.
Last year, Erdogan fired a central bank chief who was raising rates to help support the lira and stem inflation.
Since then, state-owned banks have burned through more than $100 billion buying euros and dollars in a futile attempt to support the Turkish currency.
Annual inflation now stands at 12 percent — more than double the government’s initial target — while the lira shed a third of its value at the beginning of the year under the old economic team.
Erdogan repeated his disavowal of higher rates on Wednesday however, noting: “Interest is the cause, inflation is the result.”
But he also promised to give his new finance minister and central bank chief freedom to oversee the economy as they see fit.
“We are all working together to make a new economic leap,” he said.
The markets are now focused on a November 19 central bank meeting at which Agbal will be expected to hike the main interest rate from 10.25 percent, where it has stood since being raised for the first time in two years in September.
Failure to do so could negate Erdogan’s words of goodwill and send the lira plunging again, analysts said.
“Recent strength in the Turkish lira says markets WANT to believe the positive Turkey story,” Robin Brook, chief economist at the Institute of International Finance (IIF), tweeted.
“For policy makers, it’s a big opportunity.”