ALBAWABA – Turkish President Recep Tayyip Erdogan appointed former Wall Street banker Mehmet Simsek as Finance Minister Saturday, as investors and traders look to the new minister to restore “rational” economic policies in Turkey, Bloomberg reported on Monday.
Turkey’s stock market rallied last week on expectations of Simsek’s appointment, a former Merrill Lynch strategist and personal friend to Erdogan.
However, Bloomberg questions Simsek’s ability to immediately pivot on policy, blaming Erdogan’s unconventional economic model for what they called an “investor exodus” and for high inflation.
Nonetheless, inflation rates have been slowing in April, to 40 percent.
Moreover, in May, headline inflation in Turkey is expected to decline to 39.2 percent, a Bloomberg survey predicted Monday.
“Turkey does not have any choice left other than returning to rational policy-making,” Simsek said at the handover ceremony in Ankara.
“Transparency, predictability, consistency and compatibility with international norms will be the core principles [of future economic policies],” he added.
According to Citigroup Inc. strategists, including Donato Guarino, markets are “increasingly pricing in President Erdogan returning to orthodoxy,” as reported by Bloomberg.
The group lifted their call on the country’s sovereign-debt-to-market weight from the previous underweight rating in a report on Thursday.
While they remain skeptical on the economy’s medium-term prospects, they told Bloomberg, Simsek’s appointment will offer a boost to the market, the confirmed.
Meanwhile, the Turkish Lira continued its descent, having fallen below TRY20 per dollar last week.
The lira was quoted falling below TRY21 per dollar on Monday, according to Bloomberg indicative pricing, which is said to reflect market levels and not traded or executable prices.
But Google Finance showed a 0.43 percent decline in the Turkish Lira, on Monday, to TRY21.18 against the dollar.
Turkey’s dollar bonds have outperformed most of their emerging-market peers since talk about Simsek’s appointment started circulating, the New York-based news outlet pointed out.
The country’s main stocks index gained 12 percent last week, capping the strongest performance since October 2022.
In the meantime, the extra yield on Turkey’s dollar debt has shrunk by 80 basis points in the week, according to a JPMorgan Chase & Co. index, as reported by Bloomberg.
Extra yield is an additional margin added to the original yield on notes and bonds upon investor demand to mitigate risks and rising costs.
The yield on its notes due 2047 fell 12 basis points in early London trade on Monday to 9.1 percent.
Turkish default insurance costs also dropped more than 100 basis points last week, sending five-year credit default swaps to 554 basis points on Friday.
In the coming months, investors will reportedly look to Erdogan ceding authority over the economy to Simsek, according to Bloomberg.
Notably, three central bank governors have come and gone since 2019 under Erdogan, in pursuit of lower interest rates.
Nonetheless, there are signs that the central bank is stepping back from its costly backdoor interventions in the lira, Bloomberg reported.
Moreover, Marek Drimal, Societe Generale’s lead CEEMEA strategist, said Simsek’s appointment, the possibility of higher interest rates, and summer tourism revenues will likely prevent a major lira selloff in the coming months.
Looking forward, though, he warned that adjustment to Turkey’s external imbalances and credit expansion is necessary. Otherwise, “the lira may again get into trouble during next winter.”
