Turkish equities surged to record levels, as the lira maintained all-time lows, due to the appointment of two former bankers from Wall Street to a revamped economic team which will tackle the nation’s economy. Investors are growing optimistic the new team will begin to implement more conventional economic policies.
The Borsa Istanbul 100 Index rose up to 1.8%, hitting an all-time high of 5,730.19, extending its gains to 25% since the presidential elections were finalized in the second round on May 28th. However the benchmark remains one of the worst performing indexes this year in US dollar terms, falling 18% due to weakness in the lira, which has accelerated as investors have seen signs that the costly intervention strategy the government has pursued is being loosened.
The index has been rising since President Recep Erdogan promised to hire a new economy team with “international credibility,” in his first speech following his electoral victory. He has already appointed Hafize Gaye Erkan, a former co-chief executive officer of First Republic Bank, to head the nation’s central bank, as well as Mehmet Simsek, a former Merrill Lynch strategist, to be the new treasury and finance minister.
Investors are hopeful that the new appointments will show Turkey is retreating from its unorthodox economic policies which have caused investors to flee from its economy in recent years.
The optimism among investors has also been buoyed by the growing belief that the nation has run out of the scope to continue its current economic policies, as evidenced by the record current account gap it has seen earlier in the year. Meanwhile the costly interventions have depleted foreign reserves, and kept the lira artificially stable.
In April the current account deficit widened unexpectedly to $5.4 billion according to central bank data released on Monday, up from a revised $4.9 billion in March.
Goldman economists Clemens Grafe and Basak Edizgil said in a note before the data release, “While the summer months will relieve some of this pressure as tourism income rises and debt repayments fall, we think this reprieve will be short-lived and a sizable depreciation of the exchange rate and a tightening in policy is necessary.”
Since Erdogan’ victory at the polls on May 28th, the lira has depreciated over 15% versus US dollar.
Deutsche Bank strategists including Christian Wietoska noted in a report, “Regulations have likely increased market distortions and unwinding these measures in a way that doesn’t pose risks to financial stability will be challenging, especially as they have raised the threshold for effective tightening via policy rates.”
