Bond-Market Whisperer Seen Silenced in Turkey Cabinet Shake-Up

  • AK Party names candidate for premier as Simsek’s job in doubt
  • 13 years of pro-market policies under threat in new government
Mehmet Simsek, Turkey's deputy prime minister pictured at Bloomberg LP's European headquarters in London, U.K., on Monday, Jan. 18, 2016.
Mehmet Simsek, Turkey's deputy prime minister pictured at Bloomberg LP's European headquarters in London, U.K., on Monday, Jan. 18, 2016.
Luke Macgregor/Bloomberg

Four elections, multiple terror attacks, a new central bank governor and the ousting of a prime minister: Turkey and its investors have been through a lot together in the past two years.

Despite the chaos, they found reassurance in Deputy Prime Minister Ali Babacan and his successor Mehmet Simsek, who ran economic policy with a pragmatism that defied the political convulsions around them. That may come to an end if Simsek doesn’t survive a cabinet reshuffle after the party that President Recep Tayyip Erdogan co-founded votes in a new prime minister on Sunday.

The risk that the former Merrill Lynch strategist may lose his job could mark the ruling Justice and Development Party, or AK Party’s, clearest break from 13 years of pro-market policies that helped underpin a more than 10-fold increase in foreign direct investment. The power shake-up -- which saw the party name a close ally of Erdogan’s as candidate for premier on Thursday -- is dissuading London fund managers GAM UK Ltd. and PineBridge Investments Europe Ltd. from buying Turkish bonds, the worst-performing debt in the developing world this month.

“If ‘the last man standing’ Simsek was sidelined, I think that would not be great for markets,” said Caroline Gorman, a money manager at GAM UK, who credits him with maintaining a rapport with investors and acting as a moderating influence on government policy. He is “always ready to talk to investors, he sells the government’s policy well, and he comes across as a frank speaker,” she said.

A slump in 10-year bonds has pushed yields up 95 basis points in May, more than any other emerging-market peer, according to data compiled by Bloomberg. The Borsa Istanbul 100 Index’s 9.5 percent drop in the period surpassed all of the other 92 benchmarks tracked by Bloomberg. The cost of credit default insurance for five years rose to 279 basis points, the most since March 8.

As the AK Party’s convention approaches Sunday, speculation is growing that Simsek will be replaced. One of the candidates tipped to succeed him is Energy Minister Berat Albayrak, Erdogan’s son-in-law.

The impending cabinet shift follows Prime Minister Ahmet Davutoglu’s decision to step down this month over a power struggle with Erdogan that is said to have centered on management of the economy and the president’s efforts to add an executive role to his traditionally ceremonial office.

“The risk is a new cabinet that is populated by those known for their market-unfriendly statements but who are ultimately loyal to Erdogan,” said Michael Harris, the head of Turkey research at Renaissance Capital Ltd. in London.

The AK Party on Thursday announced that Binali Yildirim, Turkey’s transport minister, is their sole candidate to become the new prime minister. While local markets were closed for a holiday, the lira traded 0.3 percent weaker at 2.9974 per dollar at 1:55 p.m. in Istanbul, the weakest level since Jan. 27 on a closing basis.

Erdogan Buffer

Before being elected president in 2014, Erdogan was prime minister for 11 years. As president, he has been criticized by investors for overstepping his mandate by attempting to interfere with the central bank’s decision-making and urging policy makers to cut interest rates to support the economy even when that would fan above-target inflation.

Simsek acted as a buffer to Erdogan’s push against orthodox monetary policy. In various roles as economy minister and finance minister from 2007 to 2015, he maintained fiscal discipline during a period in which the ratio of public debt to gross domestic product fell to 33 percent from 46 percent.

“We cannot see a positive scenario evolving for Turkish assets without Simsek playing a significant role within the government,” said Anders Faergemann, a money manager at PineBridge, which has $84.5 billion in assets under management. “His influence will diminish irrespective of who will be prime minister and as such we prefer to remain underweight Turkey at this juncture.”

‘Last Bulwark’

Simsek’s survival would be only one step toward rebuilding confidence. There’s also the possibility that the AK Party could seek a snap election to win the parliamentary seats needed to change the constitution and give Erdogan an executive role. Turkey is also vulnerable to worsening security along its border with Syria and its markets are among the most prone to outflows in the developing world from any increase in U.S. interest rates, which diminishes the appeal of riskier assets.

Foreign funds pulled $481 million from Turkish stocks and bonds in the week ending May 6, the biggest weekly withdrawals this year, according to central bank data.

Simsek is “the last bulwark to an orthodox view of the economy,” said Philippe Dauba-Pantanacce, a senior economist and global political analyst at Standard Chartered Plc in London. “Should he disappear from the new team, it would be seen as the complete disappearance of all the pragmatists in Turkey.”

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