© Reuters. FILE PHOTO: Turkish lira and US dollar banknotes are seen in this illustration taken on March 10, 2023. REUTERS/Dado Ruvić/Illustration/File photo
Written by Canan Der
(Reuters) – The Turkish lira extended its recent losses, shedding more than 1% against the dollar on Monday, while dollar-denominated stocks and bonds rallied after the appointment of highly regarded Mehmet Simsak as finance minister.
Şimşek won the confidence of the markets as finance minister and deputy prime minister between 2009 and 2018, and his appointment is seen as signaling a return to a more traditional politics. On Sunday, he said there was no choice but to return to a “logical ground”.
The lira, which is under pressure ahead of the May elections, fell to 21.18 per dollar from 20.9 on Friday and is about 12% weaker so far this year. It rose briefly to a record low of 21.8 on May 31.
Data on Thursday showed that the central bank’s net foreign exchange reserves fell to an all-time low on May 26, at minus $4.4 billion, as it sought to counter demand for foreign exchange.
Simsek’s appointment is seen as a sign that the newly elected government of President Recep Tayyip Erdogan is moving away from unorthodox interest rate cuts in the face of the high inflation that has depressed the lira for so long.
“The hope is that (Simsek) can spark much-needed economic doctrine and engage the market more effectively,” said Mohamed Elmi, senior portfolio manager for emerging markets fixed income at Federated Hermes (NYSE:).
“A simple return to a reliable economic policy can see a significant change in investment attractiveness in Turkey,” he said, pointing to a positive long-term outlook with a young population, thriving middle class and prime strategic location.
Turkey’s dollar-denominated government bonds rose as much as 1.1 cents, and the cost of insuring against a Turkish debt default fell, with credit default swaps down 541 basis points from Friday’s closing level of 550 basis points, according to data from S&P Global ( NYSE 🙂 Market Show wit.
Back to Orthodoxy
In a sign of relief at Simsek’s appointment, the benchmark BIST-100 stock index was up 3.03% by 0941 GMT and the banking index was up 1.24%.
After his appointment, Simsik said Turkey had no choice but to return to the “rational ground” to ensure predictability in the economy.
“The details presented by Simsek, especially in the handover ceremony, were seen as a clear signal of a return to traditional policies,” said Serdar Bazy, director of Global Securities Research Group.
“I was expecting a temporary rise in the stock market after the election, regardless of Simsek’s appointment. Simsek is just extending his gains in the market,” said investment analyst Tunc Satiroglu.
Stock markets are mainly driven by domestic investors after foreign holdings dwindled in recent years.
“We can expect foreign inflows to resume starting today, as institutional investors are likely to take advantage of the anticipation and start building their positions before seeing the results of Simsek’s policies,” said Enver Erkan, chief economist at Dynamic Ytrim Brokerage.