The Next Big Trader Bet Is Who Will Run Turkey's Economy

  • Investors rooting for Simsek, Babacan to join cabinet
  • New appointments may be announced as early as Wednesday night

Turkey’s political drama didn’t end with the election this month -- there’s still the burning question of who will direct economic policy in the new cabinet.

Most traders are rooting for the inclusion of acting Finance Minister Mehmet Simsek and former Deputy Prime Minister Ali Babacan. They steered the economy during the AK Party’s 13 years in office, helping to boost growth and tame inflation from a high of 104 percent in the 1990s.

“Those two names are important not only because they’re orthodox but they’re also seen as sufficiently senior to keep policy on track,” Paul McNamara, a fund manager at GAM UK Ltd. in London, said by e-mail on Wednesday. “Anyone who is seen as an Erdogan mouthpiece will be a major issue” as it increases the risk of political pressure on the central bank to keep interest rates low, he said.

New government ministers may be announced as early as tonight and will be decisive both for how Turkey’s $720 billion economy will be run and investor perception of the nation’s political risk. It’s the latest in a political saga that stretches back months, culminating in a second parliamentary vote this month where the party President Recep Tayyip Erdogan co-founded won back its majority. Amid the uncertainty, foreign investors sold Turkish assets at the fastest rate on record, dragging the lira to an all-time low.

The lira has since strengthened. It climbed 1.7 percent in November, the most among 24 emerging-market currencies tracked by Bloomberg, to 2.8663 against the dollar at 5:37 p.m. in Istanbul.

In Charge

Turkey is also said to be preparing a “mini-cabinet” to run economic policy with Prime Minister Ahmet Davutoglu at the helm. While it would address some concerns about who’ll steer the Middle East’s biggest economy, it could also add to the confusion over who is actually in charge.

Its structure will be “flexible,” allowing the premier to invite various officials to participate depending on the subjects at hand, according to an official who asked not to be identified because details of the plan aren’t public yet. Davutoglu will act as a mediator and will make final decisions, while Erdogan will also be part of the system, the official said.

“Davutoglu is talking the talk as to the importance of fiscal discipline and structural reform,” London-based Timothy Ash, the head of credit strategy for Europe, the Middle East and Africa at Nomura International Plc, said in an e-mailed note. “Let’s see if he is prepared to walk the walk, and whether the reformers have prominent positions in his cabinet.”

Vulnerable

While Turkey, a net-energy importer, has benefited from lower oil prices and slowing domestic demand to shrink its current account deficit, the gap will be the largest among the Group of 20 countries as a proportion of output this year, according to economist estimates compiled by Bloomberg. That makes the country particularly vulnerable to a reversal of capital inflows, especially given the prospects of higher U.S. borrowing costs.

“The question is how centralized economic policy -- and that includes monetary policy -- will be?" Luis Costa, the head of strategy for central and eastern Europe, the Middle East and Africa at Citigroup Inc. in London, said by e-mail. "It will take time to understand the real dynamics within the new AKP cabinet.”

((An earlier version of this story corrected a title in the second paragraph))

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