What Analysts Say About Erdogan's Plan to Tighten Grip on Policy

(Bloomberg) -- President Recep Tayyip Erdogan’s intention to tighten his grip on the economy and take more responsibility for monetary policy if he wins an election next month has fueled concern about the credibility of the nation’s central bank, analysts said.

The lira declined to a fresh record against the dollar after Erdogan told Bloomberg TV in London that after the vote transforms Turkey into a full presidential system, he expects the central bank will have to heed his calls for lower interest rates.

What Analysts Say About Erdogan's Plan to Tighten Grip on Policy

His comments come days after the lira’s implied-carry appeal versus the rand declined to the lowest in more than a year. The spread between their potential one-month carry trades fell to 0.27 percent per unit of volatility on Friday, and has been little changed since. The currency weakened as much as 0.7 percent before trimming its loss to 0.1 percent as of 8 a.m. in London. The nation’s bonds also slumped to a new record low.

Below are what analysts said on the interview and the outlook for Turkey’s markets:

Central Bank Credibility

Tsutomu Soma, Tokyo-based general manager for SBI Securities Co.’s fixed-income trading:

  • Erdogan’s remarks raise concern about the credibility of the central bank. The market probably thinks the Turkish central bank would need to raise rates given the nation’s faster inflation and to halt the declines in their currency, but politicians in general usually don’t like to hike rates
  • That type of comments raise concerns about the independence and the credibility of the central bank, which is a negative for the Turkish currency

More Selloffs

Kota Hirayama, senior economist for emerging markets at SMBC Nikko Securities Inc. in Tokyo:

  • The lira faces further risk of selloffs until the election next month as there will be more comments from officials that will fuel concerns about the country’s outlook
  • It’s still unclear how much more pressure Erdogan plans to put on the central bank; he has been going against the central bank’s move to tighten monetary policy, but he hasn’t really taken action
  • If he’s elected, it would be his first presidency under the new scheme that would allow him to have more power, so it’s hard to gauge what exactly he might do
  • READ: How Erdogan Made Turkey’s Next Election Like No Other: QuickTake
  • The key would be his selection of cabinet ministers; if he chooses people like Deputy Prime Minister Mehmet Simsek and the former Deputy Prime Minister Ali Babacan with ample experience of handing the markets, it could help the central bank build some guard

Market to Punish Lira

John Hardy, the head of foreign-exchange strategy at Saxo Bank in Hellerup, Denmark:

  • The problem is Erdogan’s interference and lack of confidence that the central bank has any independence to pursue policies of its own accord
  • The market will punish the lira. That’s why the lira is where it is. It will go lower at least until the election and possibly a negative spiral thereafter if Erdogan makes unproductive moves
  • Wondering if he is planning on something more drastic like capital controls
  • The lira could test 4.50 per dollar next month or so and then “very uncertain thereafter”

Sentiment Already Weak

Ziad Daoud, the Dubai-based chief Middle East economist for Bloomberg Economics:

  • Sentiment has been the main reason behind the decline of the lira this year, and Mr Erdogan’s comments won’t improve that
  • Investors have been concerned about government intervention in monetary policy, which is compromising the independence of the central bank. The President’s latest remarks will indeed make some uncomfortable – unfortunately, unnerving investors is that last thing he needs to do if he wants to stabilize the lira
  • READ: TURKEY INSIGHT: Erdogan Needs to Charm Lira Higher Before Vote

Harder to Hike

Kengo Suzuki, a currency strategist at Mizuho Securities in Tokyo:

  • Erdogan’s intention to take more responsibility for monetary policy makes it even harder for Turkey’s central bank to raise interest rates next month
  • Investors are concerned that Erdogan will interfere with central bank independence, which in turn will hurt the currency’s credibility
  • High carry makes it very expensive to short lira
  • Should Erdogan start to take rational actions, there would be big room for the currency to recover

To contact Bloomberg News staff for this story: Yumi Teso in Bangkok at yteso1@bloomberg.net, Daisuke Sakai in Tokyo at dsakai2@bloomberg.net, Netty Ismail in Dubai at nismail3@bloomberg.net, Masaki Kondo in Singapore at mkondo3@bloomberg.net.

©2018 Bloomberg L.P.

With assistance from Yumi Teso, Daisuke Sakai, Netty Ismail, Masaki Kondo