Turkish Assets Fluctuate Ahead of Erdogan's Cabinet Announcement

(Bloomberg) -- Turkey’s lira fluctuated between gains and losses as Recep Tayyip Erdogan took his oath as an executive president with vastly expanded powers and before he announces his cabinet.

The currency reversed earlier gains of as much as 1.3 percent against the dollar to drop 0.9 percent after Turkey announced changes in central bank law. An official decree removed Article 25 of the nation’s central bank law that says governors are appointed for a five-year term with a cabinet decision and may be reappointed after their term expires. It didn’t set an alternative term.

President Erdogan was sworn in Monday afternoon and will unveil his cabinet around 9:30 p.m. in Istanbul. He will appoint members of his cabinet, which is expected be reduced to about 16 in strength from the current 27, and also has the power to appoint other high-level officials.

While the new system boosts the president’s powers and cuts those of the parliament, investors are on the lookout for cabinet members’ names that may provide clues on any future policy bias. They are waiting to see whether those with a pro-market image such as Deputy Prime Minister Mehmet Simsek and Finance Minister Naci Agbal made the cut, or if they’ll be replaced by people from Erdogan’s inner circle who prize growth over fiscal and monetary discipline.

“With above 15 percent annual inflation and $230 billion-plus external financing needs versus $26 billion net foreign-currency reserves, the economy should need urgent measures to cope with the macro imbalances,” Global Securities analysts including Sertan Kargin wrote in a note on Monday. “Turkey’s case is no longer really about who will be in the driving seat of the economy, but whether or not challenging macro measures will be taken.”

Erdogan had said he intended to take more control of monetary policy once elected as an executive president. He has also pledged to lower interest rates, putting pressure on the country’s markets ahead of the June 24 vote. His senior advisor Cemil Ertem said in late June that the names of policy makers or cabinet ministers are “meaningless” under the new system.

“For as bad as it sounds, I must agree with” Ertem, said Cristian Maggio, head of emerging market strategy at TD Securities in London. “I think it’s all about what’s in Erdogan’s mind. That said, the usual names that are market-friendly would make the cabinet more palatable.”

The lira was 0.2 percent weaker at 4.5822 per dollar as of 5:33 p.m. in Istanbul as the changes in central bank law spooked investors ahead of the cabinet announcement. The decree also removed a clause that said central bank deputy governors are appointed for a five-year period through “joint decision and with recommendation of the governor.”

The Borsa Istanbul 100 Index, benchmark gauge of Turkish equities, was 0.4 percent higher, after paring earlier gains of as much as 2.1 percent. The yield on 10-year government bonds dropped 36 basis points to 17.07 percent.

--With assistance from Selcan Hacaoglu.

To contact the reporter on this story: Tugce Ozsoy in Istanbul at tozsoy1@bloomberg.net

To contact the editors responsible for this story: Celeste Perri at cperri@bloomberg.net, Anil Varma, Scott Hamilton

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