Turkey: New cabinet, old habits – TDS

Cristian Maggio, Head of Emerging Markets Strategy at TD Securities, suggests that their overall assessment of the new Turkish cabinet composition is negative as it confirms their expectations that Erdogan is less concerned about reinstating policy orthodoxy than he is about consolidating his greatly expanded executive powers.

Key Quotes

“From a market standpoint, however, a more notable feature is the screaming absence of market-friendly profiles. TRY had briefly rallied in the previous days on the expectation that former deputy PM Mehmet Simsek and Ali Babacan (also deputy PM in a prior administration) would have been given a ministry or other prominent cabinet role. Neither has, and nor has Naci Agbal, previous finance plenipotentiary.”

“We still see a chance that one or more of these well reputed names may appear in a subsequent set of appointments to other high seats in the state administration. Erdogan’s executive powers allow him to single handedly appoint the CBRT governor and deputy governors.”

“Most importantly, there is increasing evidence that the central bank’s independence may already be compromised on Erdogan’s (likely to be successful) attempts to extend full control over it.”

“Based on the observation of facts, we conclude that all Turkish governments led or supervised by Erdogan in the past several years have been informed to one overarching goal: growth at all costs.”

“We think there is more of the same in store for Turkey. This policy remains structurally incompatible with low inflation rates, which is the leading cause of structural TRY depreciation.”

“With reduced institutional checks and balances, diminished CBRT independence, and structurally high inflation, weaker TRY and higher rates seem unavoidable. We continue to forecast USDTRY at 6.10 by the end of 2019.”