Turkey Investors Weigh Possible Policy Moves After Shakeup

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The lira’s biggest rally in more than two years shows how high investor expectations are for market-friendly policies after the weekend shakeup of Turkey’s economic leadership.

Analysts at Societe Generale SA and SEB AB have penciled in interest-rate hikes of about 4 percentage points, after President Recep Tayyip Erdogan appointed former Finance Minister Naci Agbal as central bank governor and Finance Minister Berat Albayrak -- Erdogan’s son-in-law -- resigned.

The lira climbed more than 6% against the U.S. dollar on Monday, the Borsa Istanbul Banks Index, which tracks shares of the nation’s lenders, rallied 5.1%, and the yield on two-year government bonds fell the most in six weeks. The central bank’s next scheduled meeting is for Nov. 19.

Here are some comments from analysts and fund managers:

Phoenix Kalen, strategist at Societe Generale SA in London:

  • “The market’s strong positive reaction reflects expectations that the upheaval in economic policy making taking place among Turkey’s leadership warrants a dramatic shift in strategy – one that brings Turkey back to a more orthodox policy framework with a stronger commitment to an appropriately tight monetary stance.”
  • “There may also be a market perception that Berat Albayrak’s disappearance from the policy equation renders orthodox economic and monetary policy-setting more likely, as he had clashed previously with Naci Agbal over economic policies.”
  • With investor attention focused on the outcome of the next central bank meeting, failure to meet those expectations “could cause the lira to sharply reverse its newfound strength.”

Henrik Gullberg, strategist at Coex Partners in London:

  • “Aggressive lira depreciation eventually result in large rate hikes, and maybe the dismissal of Murat Uysal simply was a way to give the impression that a new governor will represent a shift in thinking at the central bank.”
  • “But for markets to believe that, you need to see a commitment to getting inflation down over time, not just temporarily when lira depreciation has gone out of hand.”
  • Turkish assets are rallying probably “because traders think the probability of sufficient rate hikes has increased. But that is not because a new and more hawkish central bank governor has been announced, rather that the lira depreciation has become too painful even for lawmakers to stomach, so there is no other choice. But that would have happened also under Uysal.”
  • “Albayrak’s resignation, on the other and, might be a slight positive for markets as he has struggled to convince markets he is the right man for the finance ministry job.”

Lutz Roehmeyer, Chief Investment Officer at Capitulum Asset Management GmbH in Berlin:

  • Says it seems there was internal pressure for Turkish officials to do something to “rescue” the lira
    • “But we do not have much hope. New people can of course change policies, but the question is whether they are allowed to do that. Erdogan in person was against rate hikes, a new central banker only gets credibility if he hikes the interest rates to a level that can stabilize the lira.”
  • Capitulum prefers a “once for all” rate hike because the interest rates have to catch up to a sustainable level that is needed to stop the lira from depreciating and compensate for quickening inflation.
    • “When you want to shy away speculators from shorting the lira you have to shock them with an unexpected huge hike that makes it so expensive that they stop borrowing lira to sell them. When you raise interest rates step by step, the markets can adapt to that.”

Per Hammarlund, strategist at SEB AB in Stockholm:

  • “The replacement of Uysal with Agbal must come with a shift in policy too. It would be a colossal miscalculation on Erdogan’s part if he thinks that the lira will stabilize merely by changing the head of the central bank.”
  • “There is no viable alternative to a rate hike and a return to a more transparent monetary policy framework. Thanks to the statement on the central bank’s site this morning, Agbal will be given the benefit of doubt, but not beyond November 19.”
  • “The change of guards signals a change in policy. Eventually, the central bank will hike rates -- tacitly approved by Erdogan -- as they have done in the past when all other options have been tried. However, there are no signs that Erdogan has given up on the idea that high interest rates are a source of inflation, so the return to orthodoxy will only be temporary.”
  • “Albayrak never fully gained the trust and confidence of investors so his departure, in combination with the appointment of the respected Agbal, has raised hopes of a market-friendly name taking over the finance ministry.”

©2020 Bloomberg L.P.

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