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The country’s benchmark BIST 100 index was down 1.25 percent at noon Istanbul time, and the prices of Turkish dollar-denominated bonds fell across the board.
In a rejection of economic orthodoxy, Erdogan named his son-in-law Berat Albayrak as finance minister Monday, removing some incumbent officials considered friendlier to foreign investors and sending the Turkish lira sharply lower. The lira fell around 3 percent on the news, but pared some of its losses as markets opened Tuesday.
The embattled currency is now down 17 percent since the start of 2018 over fears of double-digit inflation, insufficiently hiked interest rates and investor distrust over the Turkish central bank’s independence.
“Albayrak will have to move very quickly to reassure financial markets — and will need to send a signal that he will listen,” said Timothy Ash, senior emerging markets sovereign strategist at Bluebay Asset Management, in a Twitter post. “The economy faces a challenging time and this is a time for orthodoxy.”
The cabinet reshuffle saw the removal of Mehmet Simsek, Erdogan’s previous deputy prime minister and a former Merrill Lynch banker who was considered a reassuring force for investors and markets. Former Finance Minister Naci Agbal, a similarly orthodox figure, was also left without a prominent role, leaving investors wondering if any voices remained to temper Erdogan’s often unconventional economic views.
The president has called himself the “enemy of interest rates,” among other things, and blamed his country’s economic turmoil on unspecified external enemies rather than on problems like inflation — currently at a 14-year high of 15.39 percent — or Turkey’s gaping current account deficit. He has been criticized for keeping the central bank’s hands tied on interest rate increases, choosing to prioritize rapid growth over controlling an overheated economy.
Albayrak, a former energy minister, was known for playing a powerful role in Erdogan’s senior circle. But the nepotism has many investors concerned, said Peter Westmacott, who served as former British ambassador to Turkey from 2002 to 2006.
The appointment of Erdogan’s son-in-law “will worry a number of investors and some of the markets, because they didn’t much enjoy dealing with Albayrak when he was the energy minister,” the ambassador told CNBC’s “Squawk Box Europe” Tuesday.
Erdogan held onto the Turkish presidency after winning 52.5 percent of the vote in a snap election held at the end of June, gaining broad new executive powers as the role of prime minister was dissolved. The win comes on the back of growing authoritarian tendencies, critics of the president say, citing government purges, suppression of free press, a crackdown on the country’s Kurdish minority, and growing Islamic nationalism as threats to democracy.
And this is unfortunate, according to emerging markets investor Alan Miller, since Turkey has all the fundamentals that should make it a no-brainer for investment.
“Turkey always comes up as screamingly cheap — we’ve avoided it, partly because of the risks of the economy, the fact it has these huge current account deficits,” said Miller, chief investment officer at wealth management firm SMC Direct. “It’s a shame because you have the demographics in Turkey, and you’ve got that geographical position, it should be a fantastic market to invest in, and hasn’t really taken advantage of that.”