Turkey Markets Slump as Erdogan Assembles `Rubber-Stamping' Team

(Bloomberg) -- Turkish bonds tumbled, pushing 10-year yields to a record high, after President Recep Tayyip Erdogan tightened his grip over the central bank and appointed his son-in-law Berat Albayrak as the nation’s chief economic policy maker. Stocks also slid, while the lira pared an earlier gain.

Investors are worried that by giving himself the power to appoint central bank officials and replacing market-friendly ministers such as Mehmet Simsek, Erdogan may not scale back pro-growth policies that analysts say threaten financial stability. After months of stimulus into the June vote that formalized his role as the first executive president, Turkey’s deficits are bloated and inflation is running at more than three times the target.

“It is abundantly clear that all future strategic decisions taken about anything in Turkey will be informed by the President’s whim and the new cabinet will function purely as a rubber-stamping forum,” said Julian Rimmer, a London-based trader at Investec Bank Plc. “The only constraints set to be imposed on Erdogan are those likely to derive from bond and currency markets which may inhibit any overtly reckless economic policy making.”

Turkey raised interest rates by 500 basis points since April to stem a market rout and the lira is now one of the highest-yielding developing-nation currencies. Still, Erdogan’s open distaste for high rates is spooking investors who say the central bank needs to keep real policy rates high to meet the country’s external funding needs and prevent the economy from overheating.

‘Economy Overheating’

“They have to deal with the economic landing,” said Guillaume Tresca, a strategist at Credit Agricole in Paris. “The economy is overheating with inflation getting out of control. In our view, this serves as a good reminder for markets that the post-election relief rally is over, and Turkey’s fundamental issues are back.”

The yield on 10-year bonds jumped 77 basis points to an all-time high of 17.84 percent, ahead of a government debt auction later in the day that will see the Treasury complete its biggest monthly borrowing plan since 2011.

The benchmark stock index slid more than 2 percent, led by Isiklar Enerji ve Yapi Holding AS and Garanti Bankasi AS. The lira was 0.3 percent stronger at 4.7198 per dollar as of 1:40 p.m. in Istanbul, after rising as high as 4.6460 earlier. On Monday, it fell by by the most since the July 2016 coup attempt.

“If nothing else, Erdogan remains true to his word,” said Nigel Rendel, a senior analyst at Medley Global Advisors in London. “The central bank remains compromised, with Erdogan breathing down its neck, and it’s hard to see Albayrak pursuing any economic initiatives that have not first been approved by his father-in-law.”

To contact the reporters on this story: Constantine Courcoulas in Istanbul at ccourcoulas1@bloomberg.net;Tugce Ozsoy in Istanbul at tozsoy1@bloomberg.net

To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Anil Varma, Scott Hamilton

©2018 Bloomberg L.P.