Investors who had recently been bullish on Turkey were unfazed by the shock departure of its central bank governor, showing confidence in President Recep Tayyip Erdogan’s personal assurance that the transition to pro-market policies would continue.
In the past, such surprise changes supported periods of financial stress. Things look different this time, investors said, largely because of the qualities of new governor Fatih Karahan. Market reaction was weak on Monday, with the TRY down 0.2% against the USD.
Fatih Karahan, who succeeded Hafize Gaye Erkan, was an economist at the New York Federal Reserve and joined the revamped monetary policy committee last year in the role of deputy governor.
“Replacing Erkan, whose authority has been affected by personal issues, with a former Fed economist will positively affect the lira in the medium term”, said Evren Kirikoglu, founder of Orca Macro. “I see more rate hikes now possible to maintain confidence in the central bank, which is also positive for the TRY”, added he.
Hafize Gaye Erkan, the first female governor of Turkey’s central bank, cited personal reasons and slander against her in local media for her decision late Friday to step down after just eight months in office. Hours later, Erdogan appointed Fatih Karahan as the new governor of the regulator.
Five-year credit default swaps rose 7 basis points to 333 basis points on Monday, widening the yield gap between 2-year and 10-year notes to a record high of more than 15 percentage points.
In his first public statement on Sunday, Fatih Karahan, who has worked as an economist for Amazon.com, sought to reassure investors, saying that taming inflation was a top priority and that the central bank remained ready to act in the event of a deterioration.
The combination of persistently high inflation and a change of governor makes more rate hikes possible, which differs from recent signals from Hafize Gaye Erkan, who last month signaled an end to tightening, according to Deutsche Bank AG.
“Given our forecast of more inflationary pressures in the near term combined with the appointment of the new governor, we think there is a chance for further tightening of 250 basis points or even 500 basis points.” The latter is still not certain”, commented strategists, including Christian Wietoska.
“In a broader context, neither Erkan’s resignation nor Karahan’s appointment should be seen as much of a surprise given recent events and Turkey’s history of frequent changes in central bank management,” said Emre Akcakmak, senior consultant at East Capital in Dubai. “Finance Minister Mehmet Şimşek is in charge of Turkey’s economic management, and policies are expected to remain consistent despite changes among central bankers, even when it comes to the governor of the central bank”, added he.
From now on, the focus will be on what Karahan does and says, and whether the policy changes that began last year still have Erdogan’s support.
