November 25, 2015 / 3:27 PM / 4 years ago

For Turkey's new economy chief, litmus test will be reform, central bank

* Investors see need for structural reforms

* Simsek seen as ‘anchorman’ for economic reform

* Central bank chief appointment also key

By Asli Kandemir

ISTANBUL, Nov 25 (Reuters) - As a onetime Wall Street banker and former finance minister, Turkey’s new economy tsar Mehmet Simsek is widely seen as a proponent of sound economics and fiscal discipline.

But the real test of his credibility is yet to come, as investors wait to see whether he will be able to drive through tough structural reforms and appoint an independent central bank chief come April.

Prime Minister Ahmet Davutoglu on Tuesday named Simsek to his new cabinet as deputy prime minister in charge of the economy, a position previously held by Ali Babacan, who was left out of the new government.

The inclusion of Simsek, who previously worked at UBS on Wall Street and Merrill Lynch in London, offers some reassurance to investors concerned the cabinet is stacked with allies of President Tayyip Erdogan, including his own son-in-law.

“In Babacan’s absence, the government will need to work harder to build credibility. The new government programme and the structural reform programme should be the first tests for the new cabinet” said Yarkin Cebeci, an economist at JPMorgan in Istanbul.

Simsek takes over the job at a time when economic and monetary policy appear to bend more and more to Erdogan’s will. The founder of the ruling AK Party, Erdogan has railed against high interest rates, raising concern among foreign investors the central bank has lost independence.

Investors see the AKP’s return to single-party rule after its sweeping Nov. 1 election victory as offering an opportunity to follow through with long-neglected economic reforms. But success will largely depend on whether Simsek and others will be able to resist Erdogan’s push for populist policies.

“Simsek is the key anchorman now for economic reforms - let’s see if he has the political capital to drive these forward,” said Timothy Ash, a strategist at investment bank Nomura.

Key reforms should include labour reform to increase labour productivity and support industries that will help produce more value added export goods.

Simsek will oversee the Treasury, the central bank and coordination between economy-related institutions.

PRESSING PROBLEMS

Analysts say the most pressing problems include the need to slow a rapid increase in labour costs and scale back private sector debt. Both have hampered growth and made Turkey’s balance sheet one of the most fragile in emerging markets.

“Arguably the most rapid progress on this front can come from a tighter central bank framework, and hence the choice of central bank governor in April will be watched keenly by the markets,” UBS Strategist Manik Narain told Reuters.

Central bank Governor Erdem Basci ends his five-year term in April. Although he could be reappointed, Basci was a school friend of Babacan and their fates are seen as closely linked.

Babacan both proposed Basci as central bank governor and was seen as his main defender in the cabinet when Erdogan and ministers criticised monetary policy.

“I also wonder if Babacan’s exclusion also means the end for his close ally, Basci,” Nomura’s Ash said, adding that Basci appeared unlikely to be given another term.

In addition to Basci, three deputy central bank governors will see their terms end by June. Simsek will also need to appoint a new Treasury undersecretary. The top job at the Treasury has remained open for 15 months, since the former undersecretary went to the IMF.

“This is a clearly an Erdogan-made cabinet, and I see Simsek’s appointment as part of calming the markets,” said Ugur Gurses, a former central banker and a columnist at Hurriyet newspaper.

“His influence on outlining a detailed and do-able reform plan and appointments of the new Treasury undersecretary and the central bank governor will be the major challenges he will face.” (Editing by David Dolan and Ralph Boulton)

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