Mar­kets moody af­ter Er­do­gan’s elec­tion vic­tory

Financial Mirror (Cyprus) - - FRONT PAGE -

The Turk­ish Lira and stocks be­gan the week with gains af­ter Prime Min­is­ter Re­cep Tayyip Er­do­gan won the coun­try’s first di­rect pres­i­den­tial elec­tion, but as­sets sud­denly started drop­ping with the dol­lar/lira ra­tio ris­ing above 2.15, while the main stock in­dex re­treated below 79,000 points, the Hur­riyet daily re­ported.

Turk­ish as­sets be­gan the trad­ing day strong as the lira had strength­ened to 2.1351 against the dol­lar from 2.1601 late on Au­gust 8 and Borsa Is­tan­bul 100 in­dex rose over 1.6% to over 80,000 points.

How­ever, the cur­rency and stocks rapidly be­gan to de­cline in the morn­ing ses­sion, as the in­vestor op­ti­mism that af­fected mar­kets in the morn­ing has re­versed, the pa­per added.

The lira eased back to around 2.154, while the main Is­tan­bul share in­dex dropped by more than 1% to around 78,300 points. The bench­mark 2-year govern­ment bond’s yield had fallen to 9.23% from 9.36 on Au­gust 8.

Er­do­gan’s vic­tory was taken as a sign of con­ti­nu­ity at first, but an­a­lysts also warned of medium-term risks to eco­nomic pre­dictabil­ity emerg­ing from the con­cen­tra­tion of power.

At­ten­tion is now turn­ing to the ap­point­ment of a new prime min­is­ter and eco­nomic man­age­ment team, an­a­lysts say. Mar­kets will be look­ing for any changes among the main fig­ures on the eco­nomic team, such as Deputy Prime Min­is­ter Ali Baba­can.

“We ex­pect that the mar­ket will re­fo­cus on the com­po­si­tion of the Cabi­net, with the ab­sence of key fig­ures such as Ali Baba­can - well-re­garded by mar­ket par­tic­i­pants and thus far cen­tral in the pro­mo­tion of sound eco­nomic pol­icy in Turkey - likely to catal­yse a marked de­te­ri­o­ra­tion in Turk­ish as­sets on in­vestor con­cern over the fu­ture tra­jec­tory of eco­nomic pol­icy-mak­ing,” Phoenix Kalen, a Lon­don-based strate­gist at So­ci­ete Gen­erale, wrote on Mon­day.

But in the long term there are con­cerns about con­cen­tra­tion of power in the hands of a some­times im­pul­sive leader and the ero­sion of key checks and bal­ances in the sys­tem, ac­cord­ing to some an­a­lysts. Er­do­gan has vowed to ex­er­cise the full pow­ers granted to the pres­i­dency un­der cur­rent laws, un­like his pre­de­ces­sors.

“The pres­i­dency has un­til now been a largely cer­e­mo­nial po­si­tion, but it seems that Mr. Er­do­gan will seek to con­cen­trate more power in the role. If this hap­pens, his vic­tory could lead to a more bel­liger­ent and un­pre­dictable pol­i­cy­mak­ing en­vi­ron­ment,” said Wil­liam Jackson, Cap­i­tal Eco­nom­ics emerg­ing mar­kets econ­o­mist. “In time, a de­te­ri­o­ra­tion in the pre­dictabil­ity of pol­i­cy­mak­ing and, more gen­er­ally, in­sti­tu­tional stan­dards in Turkey would de­ter in­vestors and make it more dif­fi­cult to at­tract cap­i­tal in­flows.”

Er­do­gan had been in­sist­ing on lower in­ter­est rates be­fore the elec­tion, rais­ing con­cern over the Cen­tral Bank’s in­de­pen­dence. He says high in­ter­est rates cause high in­fla­tion and has re­peat­edly ac­cused an “in­ter­est rate lobby” of spec­u­la­tors of push­ing for higher rates and seek­ing to un­der­mine the Turk­ish econ­omy.

The cen­tral bank has al­ready cut its main one-week repo rate by 175 points since May, moves which some econ­o­mists see as hard to jus­tify given per­sis­tently high in­fla­tion.

“The pres­sure on the Cen­tral Bank to ease mone­tary pol­icy will per­sist. Er­do­gan had been quite vo­cal re­gard­ing the ne­ces­sity to cut in­ter­est rates and he will con­tinue to be so,” said Thu Lan Nguyen, a cur­rency strate­gist at Com­merzbank.

“The likely con­tin­u­a­tion of the rate-cut cy­cle will put pres­sure on the lira, par­tic­u­larly when mone­tary pol­icy in the U.S. is nor­malised.”

Turkey is sus­cep­ti­ble to changes in global liq­uid­ity con­di­tions be­cause of its large cur­rent ac­count deficit.

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