Investors’ doubts remain after Turkey’s “small step” towards ending the crisis

Fund managers said Turkey’s first rate hike since 2021 was a “small step” toward restoring investor confidence in the country’s financial management. But they said they still doubted that President Recep Tayyip Erdogan would allow the unorthodox policies that caused years of economic crisis to collapse completely.

The central bank on Thursday raised its main interest rate to 15 percent from 8.5 percent, while pledging to tighten policy as needed as it tries to bring down inflation of nearly 40 percent.

The move was the clearest sign yet that the economic team Erdoğan created after his victory in the May elections — led by Finance Minister Mehmet Şimşek and Central Bank Governor Hafid Gay Erkan — will use traditional economic tools to put the Turkish economy back on a more sustainable path and try to attract investors who have abandoned the market. .

However, the size of the increase disappointed some investors and local market participants who expected an increase of up to 20 percent or even 40 percent. “It’s a small step in the right direction. [but] “I think it’s probably not enough to change sentiment,” said Paul McNamara, investment director at GAM in London.

“It was somewhat disappointing in that it didn’t feel the urgency and decisiveness that the markets were looking for,” added Emre Akakmak, senior advisor at East Capital, a fund manager specializing in emerging markets.

The lira fell about 5 percent to a record low of more than 24 lira per US dollar after the decision, while the cost of protection against Turkish debt default rose. The selling continued into Friday as the currency weakened after 25 for the first time, leaving it down about 26 percent this year.

And JP Morgan Bank warned that it now expects general inflation to end at 50 percent, from its previous forecast of 45.5 percent, saying: “The authorities revealed their preference for growth and employment over inflation before the local elections in March 2024.”

The bigger question about the size of the rally, investors said, is whether the more muted move than expected signaled that Semşek, a former deputy prime minister who is revered by investors, and Erkan, a former Goldman Sachs executive and specialist. In managing risks, they will be given the freedom they need to make more aggressive economic policies.

With the current account deficit rising to record highs, fueled by a $36 billion goods trade gap, a domestic economy that many analysts say is overheating, and a currency seen as overvalued despite massive declines in recent years, the The interventions that Chimchik needs are expected to be painful in the short term.

“Not only will it raise prices per se, but the market will feel that the limits of Simsek’s mandate are becoming clear,” said Murat Gülkan, CEO of OMG Capital Advisors in Istanbul, adding that “with the approaching municipal elections, the risk is . . . Results fail to materialize, then the political will is damaged and Simsek’s independence can be questioned.”

“The big advantage with Şimşek is that there is someone back in the room who will put that [orthodox] A case for Erdogan.” But he said he was also worried about how far the Turkish central bank could go in raising interest rates before Erdogan changed his mind.

Curtis said that during Shemshik’s previous tenure as deputy prime minister and finance minister from 2009 to 2018, he “spent a lot of time talking to investors about what he wanted to do, and then he wasn’t really allowed to do it.” In a sign of how quickly Erdogan could change the course of politics, Naji Agbal was fired just months after he took over as central bank chief in early 2021 after borrowing costs sharply increased.

Simsek appeared to try to allay market fears after Thursday’s central bank meeting, vowing that Turkey would shift to a “rules-based” fiscal and monetary policy focused on “sustainable” economic growth. He also said that the country will move to a “free foreign exchange system”.

The promises matter because a central focus of Erdogan’s economic policies has been regulations and other measures that have made it difficult for consumers and businesses to trade and hold foreign currency. The central bank has also spent at least $24 billion this year trying to defend the lira, a move that has left the country’s foreign exchange war chest depleted.

McNamara said that along with the bank’s policy rate hike, it would be important to see Turkey back away from currency interventions and also take more decisive steps away from the credit-driven growth that has created significant imbalances in the Turkish economy.

“It is fair to say that we are not accumulating Turkish assets at the moment.”

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