New Turkey Bank Chief Keeps Precarious Grip on Market Approval

  • Centikaya appointment eases concerns over political pressure
  • Turkish bond rally helped by emerging markets lift from Fed

Turkey’s new central bank chief faces an early challenge when he starts work on Tuesday: convincing investors he can defend monetary policy from government meddling.

The nomination last week of Murat Cetinkaya, a deputy to the outgoing Erdem Basci, helped send Turkish bonds up the most in emerging markets outside Brazil, while the cost of insuring the country’s debt against default fell to a one-month low. Yet Aberdeen Asset Management, which oversees about $85 billion of developing-world assets, was among investors urging caution.

Murat Cetinkaya

Source: Turkiye Cumhuriyet Merkez Bankasi

Persistent attempts by President Recep Tayyip Erdogan and other senior government officials to strong-arm the central bank into cutting interest rates and pursue growth over targeting inflation have rattled markets for two years. That risk hasn’t disappeared.

“Cetinkaya’s ability to withstand this pressure is the biggest unknown,” Atilla Yesilada, an Istanbul-based economist at emerging-markets research company Globalsource Partners Inc., said by e-mail.

Honeymoon Period

Turkish government bonds surged last week with the yield on 10-year notes dropping 57 basis points over the five days to Friday, the most since October. The appointment from within the central bank has helped alleviate investor concern the government would put a political yes man in charge of monetary policy.

The coming weeks will reveal how much of the current buoyancy in Turkish markets reflects investor endorsement of the new governor, and how much comes from a broad rally in riskier assets.

"We have to wait to see what he will deliver," said Viktor Szabo, who helps oversee $11 billion of emerging-market debt, including Turkish bonds, at Aberdeen in London. "Let’s not forget that it is a risk-on world now."

For now, Cetinkaya’s honeymoon period on the markets continues, helped by an upward trajectory across developing countries on account of Federal Reserve Chair Janet Yellen’s hesitancy in raising interest rates.

“Perhaps the new governor should buy Janet Yellen a drink the next time they meet,” Nigel Rendell, a senior analyst at Medley Global Advisors LLC in London.

Early Tests

Investors may not have to wait long before Cetinkaya’s ability to control policy is tested amid conflicting demands.

Just this month, Turkey’s Economy Minister Mustafa Elitas said the central bank should lower borrowing costs “radically." At the same time, inflation will probably accelerate to 8.5 percent by year-end, according to the median estimate of 24 analysts polled by Bloomberg, up from 7.5 percent in March, well ahead of a 5 percent target in place since 2012.

As Turkish bonds gained, the lira fell for a second week, suggesting to Aberdeen’s Szabo that the new governor will maintain his predecessor’s bias against tightening policy. The currency swung between gains and losses on Monday, trading 0.1 percent higher at 2.8533 per dollar as of 1:13 p.m. in Istanbul.

The central bank lowered interest rates for the first time in 13 months in March, and the cross-currency swap market is pricing another 50 basis-point cut to the upper end of the interest-rate corridor over the next two months.

Maarten-Jan Bakkum, senior emerging-markets strategist at NN Investment Partners which manages assets of 187 billion euros ($211 billion), said he is waiting to see how Cetinkaya performs before making strategic decisions on Turkey.

"He is a young guy," Bakkum said of the governor, who was born in 1976. "Hopefully he can deal with the increasing political pressures on monetary policy."

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