Turkish markets battered as Erdogan forecasts interest rate fall

Turkish equities, bonds and the lira took a hammering on Wednesday as President Recep Tayyip Erdogan predicted a fall in interest rates and investors fretted over the health of the country’s economy.

Asked about a slide in the Turkish lira since he announced his new cabinet at the start of the week, the newly re-elected Turkish president told journalists that a combined treasury and finance ministry headed by his son-in-law “will of course do whatever is necessary”, according to Hurriyet newspaper.

“In the period ahead I believe that we will see that interest rates will also fall,” he was quoted as saying.

The lira, already down on the back of worse than expected current account deficit statistics, fell late in the New York trading day on Wednesday to the TL4.9743 mark, according to Bloomberg data. The fall pushed the lira below the low of TL4.9221 it struck in a hectic trading day on May 23 that ultimately forced the central bank to raise interest rates.

Earlier on Wednesday, new figures showed that Turkey’s current account deficit climbed to $5.89bn in May. It was up from $5.45bn in April, and $5.37bn in May 2017, according to central bank data.

Turkey must find about $200bn a year in foreign financing — most of it in the form of short-term “hot money” flows — to fund the current account deficit as well as maturing debt.

But foreign investors are worried about the management of Turkey’s $880bn economy under a powerful new executive presidency that came into force after last month’s elections and centralises power in the hands of Mr Erdogan.

Asked on Wednesday whether there could be confusion caused by the new system, Mr Erdogan said: “No, it’s not possible . . . All the bodies and institutions are tied to me.”

The Turkish president is a vocal opponent of high interest rates — a stance he has maintained despite warnings from investors that a rate rise is necessary for Turkish assets to retain their attractiveness and to tame annual inflation that topped 15 per cent in June.

Investor fears that Mr Erdogan will have a greater say in monetary and economic policy under the new governance model were compounded by the president’s decision to place Berat Albayrak, the husband of his daughter Esra, in charge of the economy brief. Speaking to reporters, Mr Erdogan defended his choice, saying that Mr Albayrak, a former chief executive with an MBA from New York’s Pace University, had theoretical and practical experience in finance.

Turkish assets have come under pressure in the wake of the appointment. The benchmark Borsa Istanbul 100 stock index was down more than 5 per cent at 4pm GMT on Wednesday. An index of Turkish bank stocks was down as much as 9 per cent amid fears that lenders could face a surge in bad debts if companies struggle to service dollar and euro denominated loans.

The spread on Turkey’s 10-year dollar bond maturing in October 2028 rose to 4.48 percentage points above the equivalent US Treasury, up from 4 points on Monday and 3.37 points at issuance in April. A larger gap indicates a growing risk premium demanded by investors to hold the paper.