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Turkish currency and stocks drop after President Erdogan fires top central bank official

Key Points
  • The iShares MSCI Turkey ETF (TUR) was on track for its worst day since June 13.
  • A presidential decree released Saturday said Turkish central bank Governor Murat Cetinkaya was removed from his post and replaced with his deputy, Murat Uysal.
  • The decree did not specify why Cetinkaya was fired, but speculation of his removal had been rising given his reluctance to cut interest rates at Erdogan's behest.
  • "In a nutshell, it does seem to us like a perfect storm is in the making for Turkey and Turkish assets, which could spill over into other markets as well," says a TD Securities strategist.
President of Turkey, Recep Tayyip Erdogan (R) and Governor of Turkish Central Bank, Murat Cetinkaya (L) shake each other's hands ahead of their meeting, at Presidential Complex, in Ankara, Turkey on May 5, 2016.
Yasin Bulbul | Anadolu Agency | Getty Images

Turkey's stocks and currency dropped on Monday as investors ditched Turkish assets after the country's central bank governor was ousted by President Recep Tayyip Erdogan.

The iShares MSCI Turkey ETF (TUR) slid 2.3%, on track for its worst day since June 13. The ISE National 100, Turkey's main stock index, dropped nearly 1%. Meanwhile, the Turkish lira dropped more than 1.5% to trade at 5.718 per dollar.

A presidential decree released Saturday said Turkish central bank Governor Murat Cetinkaya was removed from his post and replaced with his deputy, Murat Uysal. The decree did not specify why Cetinkaya was fired, but speculation of his removal had been rising given his reluctance to cut interest rates at Erdogan's behest. Cetinkaya's dismissal comes at a time when Turkey's economy is in disarray and Erdogan struggles to maintain political power.

"In Turkey, institutional quality continues to deteriorate," Alberto Gallo, head of macro strategies at Algebris Investments. "While the slow-moving dynamics of the country remain concerning, a small adjustment in monetary policy following the changeover at the top may not alter the fundamental picture too much."

Turkey's economy contracted by 3% in the fourth quarter of 2018 and by 2.6% in the first quarter of 2019, FactSet data shows. The country's GDP is also expected to have fallen by 2% in the second quarter. Inflation sits above 17%, well above its 10.3% rate in early 2018. Data released last week also showed consumer spending fell in June to its lowest level in a year.

The Turkish lira has taken a beating amid the economic slowdown and surging inflation. Over the past year, the currency is down more than 25% against the dollar. The Turkish central bank tried to defend the lira through rate hikes. Turkey's one-week repo rate sits at 24%, up from 8% in March of 2018.

The central bank, "however slow it may have been to react to rising inflation and lira weakness last year, eventually pushed rates to 24% and left them there for nearly a year," said Cristian Maggio, head of emerging markets strategy at TD Securities, in a note. "This has strained Erdogan's patience and frustrated his desire to see economic activity re-accelerating as soon as possible. Cetinkaya was likely seen as an obstacle in the process of pushing growth faster."

Meanwhile, Erdogan's stronghold over Turkey took a massive hit recently after an opposition party candidate became the new mayor of Istanbul. Ekrem Imamoglu won Istanbul's re-run mayoral election last month in one of the biggest blows to Erdogan in his 16 years in power.

"In a nutshell, it does seem to us like a perfect storm is in the making for Turkey and Turkish assets, which could spill over into other markets as well," Maggio said.

—CNBC's Michael Bloom contributed to this report.

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