Jul 04 2018

Erdoğan should be a grown-up – Bloomberg columnist

Turkish President Recep Tayyip Erdoğan is set to outline the agenda of his strengthened office following an inauguration ceremony on July 8 and his rhetoric will be critical in setting the future direction of Turkey’s embattled financial markets, said Marcus Ashworth, a columnist for Bloomberg.

“Erdoğan must choose whether his uses his mandate and substantially increased powers to become a dictator, or a grown-up,” Ashworth said. “Hopefully he’ll opt for the latter — to secure his legacy he needs to stop the rot in the economy, and that means putting it into professional hands.”

Erdoğan had roiled financial markets in May when he told investors in London that he planned to take more control of monetary policy and cut interest rates should he be re-elected on June 24. The lira sank to a record low of 4.92 per dollar later that month, forcing the central bank to hike interest rates by 425 basis points to 17.75 percent. Now that he has won the vote, investors will want to be assured that Erdoğan respects the independence of the central bank.

If he does, and his promises are convincing, then there are rich pickings for investors in Turkey. Turkish 10-year lira-denominated government debt yields about 16.7 percent compared with German bunds at 0.3 percent and Russian bonds at 7.7 percent. Should the lira remain steady, or even depreciate at a modest pace, then returns would be substantial, Ashworth said.

“The trouble is, you can’t count on him,” he said. “On the one hand, he shoots from the hip and doesn’t understand economics, but on the other, he’s prey to outbursts of rationality.”

Erdoğan won presidential elections in a first round last month, meaning enhanced powers narrowly approved in a nationwide referendum in April last year will come into effect. The post of prime minister will be abolished, along with the executive powers of ministers, and policy will be made and applied from Erdoğan’s palace in Ankara.

“It would be bold to say that, having achieved power, reason will prevail, he’ll recognize his weaknesses, and leave policy makers alone,” Ashworth said. “It’s a big risk to bet on it — which is standard practice in emerging markets.”