Turkish assets, lira rebound as Davutoğlu soothes investor fears

ISTANBUL/ANKARA - Reuters

AFP photo

Turkish markets rebounded on May 5 after Prime Minister Ahmet Davutoğlu appealed to Justice and Development Party (AKP) members to avoid any splits when he steps down as party leader this month and vowed his loyalty to President Recep Tayyip Erdoğan, helping ease market fears.

Davutoğlu’s plan to quit, which emerged late on May 4, gave investors some clarity following days of uncertainty about his future, and his decision was widely seen as the result of tension between him and Erdoğan, who founded the party.

“Davutoğlu’s statement was interpreted as indicating that the transition period would be trouble-free. Hence the markets’ selling reaction eased,” said one bank’s treasury desk head.

“Risks have not been completely eliminated but losses have eased after comments supporting the view that the process won’t lead to more pessimistic scenarios,” he said.

The Turkish Lira, which hit 2.9765 against the dollar late May 4, stood at 2.9 late May 5, firming from 2.9340 before his speech. It had been below 2.8 on May 2, its firmest for six months.

The 10-year bond yield, which rose to 9.95 percent in early trade from 9.62 percent on May 4 eased to below 9.7 percent after Davutoğlu spoke.

The BIST 100 index, the broadest measure of the Istanbul stock market’s performance, had fallen more than 2 percent early on but was 0.4 percent higher in the May 5 afternoon.

Davutoğlu’s announcement on May 5 came after a meeting with Erdoğan late May 4 that followed weeks of public tension between the two men.

Still, his departure raises difficult questions about the government’s ability to tackle slowing growth and pass into law the structural reforms that many investors are demanding.

“The spike in political tension has weighed on TRY (Turkey)-denominated assets, amid a backdrop of deteriorating global risk appetite,” Finansbank said in a note.

“The political environment is very unpredictable, and this will certainly have negative repercussions for Turkey’s risk premium, financial volatility and macroeconomic outlook.”

Erdoğan wants an executive presidency in Turkey to replace the parliamentary system, a plan for which Davutoğlu had offered only lukewarm support.