New Turkish Minister of Finance may restore economy to a rational path

Following Recep Tayyip Erdogan’s victory in the Turkish presidential election, many investors in the country are betting that the appointment of former Wall Street banker Mehmet Simsek will bring about a more traditional economic policy, according to Bloomberg. Last Saturday, Erdogan announced the appointment of Simsek, a former Merrill Lynch strategist, as the new finance minister. Following this announcement, Turkey’s dollar-denominated debt and local stock market rose amid rising expectations for Simsek.

While it remains uncertain whether Simsek will be able to immediately influence economic policy, many are hopeful that he will have to fight the worst inflation crisis in the country in decades as a result of Erdogan’s miscalculations. Immediately after his appointment, Simsek indicated a return to traditional policies: “Turkey has no choice but to return to rational policies. Transparency, predictability, consistency and compatibility with international standards will be the main principles.”

Citigroup Inc. strategists even canceled their forecast on the country’s sovereign debt from reduced to market-average on these expectations, although they remain skeptical of the medium-term prospects for the economy. Changes also occurred in the Turkish dollar bond market, which outperformed most of its counterparts in emerging markets, and the country’s stock index rose by 12%. The cost of default insurance in Turkey fell by more than 100 basis points, and five-year credit default swaps in the country reached 554 basis points on Friday.

Now, investors must simply monitor whether Erdogan will relinquish control of the economy to Simsek, particularly after firing three central bank managers of the country beginning in 2019 and launching a campaign to sharply lower interest rates. Perhaps it won’t be as bad, as Mehmet Simsek enjoys great trust amongst global investors; the question is how free he will be from any interference. Erdogan will also need to demonstrate that Simsek is more than just a symbolic appointment after the elections.

Meanwhile, the lira fell more than 1 to 21.16 against the dollar on Monday, in addition to its 4.6% loss last week. Goldman Sachs Group Inc (NYSE:GS) forecasted a fall in the value of the lira to 28 per $1, down from an earlier forecast of 22.