(Bloomberg) -- Turkish investors are betting that the return of former Wall Street banker Mehmet Simsek as economic czar will herald a shift to more conventional economic policies.
President Recep Tayyip Erdogan appointed Simsek, a former Merrill Lynch strategist, as his new treasury and finance minister in an announcement on Saturday. Turkey’s dollar debt and stocks rallied in the past week on mounting expectations of his arrival.
Erdogan Taps Markets Veteran Simsek as Finance Minister
While questions remain over Simsek’s ability to immediately pivot on policy, many investors are pinning hopes on him to reverse Erdogan’s unconventional economic models that are blamed for an investor exodus and the worst inflation crisis in decades.
In his first remarks following the appointment, Simsek signaled a return to conventional policies. “Turkey does not have any choice left other than returning to rational policy making,” he said at the handover ceremony in Ankara. “Transparency, predictability, consistency and compatibility with international norms will be the core principles.”
According to Citigroup Inc. strategists including Donato Guarino, markets are “increasingly pricing in President Erdogan returning to orthodoxy.”
They lifted their call on the country’s sovereign debt to market weight from underweight in a report on Thursday, noting that while they remain skeptical on the economy’s medium-term prospects, Simsek’s appointment will offer a boost to the market.
Turkey’s dollar bonds have outperformed most of their emerging-market peers in recent days. The country’s main stocks index gained 12% last week, capping the strongest performance since October.
The extra yield investors demand to hold Turkey’s dollar debt over US Treasuries narrowed by more than 80 basis points in the week, according to a JPMorgan Chase & Co. index. The yield on its notes due 2047 fell 12 basis points in early London trade on Monday to 9.1%.
Turkish default insurance costs, meanwhile, dropped more than 100 basis points last week, sending five-year credit default swaps to 554 basis points on Friday.
Once the euphoria subsides, investors will watch out for whether Erdogan cedes authority in managing the economy, having chased out three central bank governors since 2019 in pursuit of lower interest rates.
“Mehmet Simsek has a lot of credibility with the global investing public,” said Todd Schubert, the Dubai-based head of fixed-income research at Bank of Singapore. “Of course, the question is how much he’ll be free of other influence.”
Henrik Gullberg, macro economist at Coex Partners Ltd., agreed, adding that Erdogan will need to show that Simsek is “more than a token appointment” made to “appeal to markets post election.”
There are signs, meanwhile, that the central bank is stepping back from its costly backdoor interventions in the lira. The currency slumped more than 1% to a record low of 21.16 against the dollar on Monday, adding to a 4.6% loss from last week. The interventions were part of Erdogan’s campaign to ensure exchange-rate stability.
Goldman Sachs Group Inc. sees increased pressure on the currency, revising its 12-month estimate on the lira to 28 per dollar, from an earlier forecast of 22. With international reserves close to levels that have previously seen significant lira weakness and net foreign assets in negative territory, when accounting for liabilities, the probability of a larger one-time adjustment has increased, analysts including Kamakshya Trivedi and Danny Suwanapruti wrote in a June 3 report.
Traders clearly expect more volatility, given that the extra cost of protecting against lira weakness in the coming six months — versus hedging against gains — closed at a record high of 21.7 percentage points on Friday. That’s double January levels of around 10.7, according to risk reversals.
Marek Drimal, Societe Generale’s lead CEEMEA strategist, said Simsek’s appointment, the possibility of higher interest rates and summer tourism revenues would prevent a major lira selloff in the coming months.
Longer-term though, he warned that without adjustments to Turkey’s external imbalances and credit expansion, “the lira may again get into trouble during next winter.”
What Bloomberg Economics Says...
“Mehmet Simsek called for a return to “international norms” in his first speech since becoming finance minister on Saturday. His emphasis on “rational policy making” and the need for price stability suggests he may argue for earlier rate hikes than we had anticipated. Our base case is still October, but there is now a risk that hikes could start sooner. Simsek’s push for return to orthodox policies also add to the likelihood that the current central bank governor will be replaced.”
— Selva Bahar Baziki, economist. Click here to read more.
--With assistance from Kerim Karakaya, Paul Jarvis, Alex Nicholson, Karl Lester M. Yap and John Viljoen.
(Updates prices, adds details of Goldman’s lira forecast above derivatives chart and comments by Bloomberg Economics at the end of the article.)
©2023 Bloomberg L.P.
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