Investors growing concerned about Turkey's new policy team

By Asli Kandemir and Nevzat Devranoglu

ISTANBUL (Reuters) - With just days left until Turkey is due to name a new cabinet, President Tayyip Erdogan's advisers have renewed the call for lower interest rates - a sign, some investors fear, of a more populist policy team to come.

The ruling AK Party, which was founded by Erdogan, is expected to announce its new leader on Thursday, replacing outgoing Prime Minister Ahmet Davutoglu, who said he would step aside this month after weeks of public tension with Erdogan.

Transportation Minister Binali Yildirim, a close Erdogan ally, appears to be the likely choice for party head, and therefore the next prime minister, sources in the AKP have said. A new cabinet could be announced as early as Sunday, they said.

Comments from Erdogan's camp are already giving some investors the jitters. On Wednesday, Bulent Gedikli, a presidential adviser who rarely speaks to the media, told reporters Turkey needs drastic rate cuts and a more growth-focused economic team.

"The central bank must make a series of interest rate cuts not just cuts of 25 basis points for show," he said.

"More dynamic teams should be in charge. Growth should be 5.5-6 percent and we have to introduce new vehicles to attain higher growth," Gedikli said.

The Turkish central bank has cut its overnight lending rate - the highest of the multiple rates it uses to set policy - by a total of 75 basis points in its last two meetings. That rate now stands at 10 percent, while the benchmark repo rate has held steady at 7.5 percent for more than a year.

The International Monetary Fund (IMF) said last month that Turkey needs a tighter monetary stance to bring down inflation.

Erdogan favors consumption-led growth and has said that high interest rates cause inflation, a stance that is at odds with orthodox economics.

Gedikli's comments, which caused the lira currency to weaken, prompted some speculation that Deputy Prime Minister Mehmet Simsek, who is seen as an one of the remaining anchors of investor confidence, may be on the way out.

"It is clear that the new government's priority will be boosting growth and fighting inflation will be secondary," said Haluk Burumcekci, an economist who runs Burumcekci Consulting in Istanbul.

"Gedikli's announcements strengthen the possibility of Simsek not being in the new cabinet."

INFLATION PROBLEM?

Gedikli also said that inflation was no longer a problem in the Turkish economy, arguing that the world was headed toward deflation.

That view may come as a surprise even to the central bank, given that the latest inflation print of 6.6 percent in April still remains well above the bank's own target of 5 percent.

Another economy advisor, Cemil Ertem, also called for lower interest rates. "I think the central bank still has room to cut," he told broadcaster NTV on Wednesday.

The central bank's independence has also long been a concern.

With the ouster of Davutoglu, investors are worried about whether the government will deliver on promises of long-overdue reforms to liberalize the labor market, encourage savings and bring in more private investment.

A former banker and a long-time cabinet member, Simsek is widely seen as one of few orthodox voices left in the cabinet after the former economy chief, Ali Babacan, was left out of the government in November.

Simsek's departure would likely signal that Erdogan was tightening his grip over economic management.

"I think for investors Simsek is now key, a bit like Pravin Gordhan in South Africa" said Nomura strategist Tim Ash, referring to the two-time South African finance minister who is also seen as anchor of investor confidence.

The absence of figures such as Simsek and Babacan in government increased the chance of "major policy errors" that could eventually come back to haunt Erdogan, Ash said.

Abdulkadir Selvi, a pro-government columnist in the Hurriyet newspaper, wrote this week that Energy Minister Berat Albayrak, who is Erdogan's son-in-law, is likely to replace Simsek in the new cabinet.

A day after Davutoglu's ouster, Simsek himself emphasized the importance of reforms and warned that any stalling of reforms would have a negative impact on economic growth.

Still, when asked by reporters about his future at an event last week, Simsek, 49, gave his usual non-committal answer, saying that while he missed playing tennis and spending time with his family, he would continue to serve the government if asked.

Investors may not be so unfazed.

"Simsek's exclusion from the cabinet may cause a small scale panic. If Albayrak replaces him, the panic will be bigger," said Atilla Yesilada, an analyst at Global Source Partners.

"The fate of Simsek is in the hands of the markets. If investors revolt and sell the lira, Erdogan keeps him otherwise he will retire at a young age."

(Writing by Asli Kandemir; Editing by David Dolan, Janet McBride)

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