Simsek-mania won’t last

TURKEY - In Brief 24 May 2016 by Atilla Yesilada

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With our monthly coming up in a few days, I want to defer my detailed remarks on the composition of the new administration and potential policy path to that publication to focus on market outlook with the help of the Cosmic Strategist. The gist of our message after yesterday’s CBRT O/N lending rate cut is simple: Simsek-mania won’t last and the rally is the last chance to take profits in Turkish spot markets.Firstly, Simsek doesn’t have much of an influence on economic policy, which will from now on be crafted by Erdogan’s advisors, deputy pm Mr. Nurettin Canikli, Economy Minister Nihat Zeybekci and Energy Minister Mr. Berat Albayrak. All these names desire a “nationalist” economic policy driven by low rates and directed credit to state-selected industries to stimulate growth and create national champions. Simsek will be used to convince foreign institutions that these policies will not lead Turkey to the abyss. Moreover unlike Mr. Ali Babacan, Simsek never expanded much political capital for the centrist economic ideas he advocated, and this is one reason why he was re-appointed. In specific, don’t expect him to defend the CBRT against pressures to cut rates deeper.Despite very high inflation expectations and core measures, CBRT cut rates again, with Dr Ucer and most experts forecasting another 50 basis point cut in June. I go further, based on my review of recent monetary cycles: CBRT will be forced to pursue monetary expansion until the lira is weakened to the point of a mini-crisis. As of today, the futures market assigns 60% odds to second rate hike by Fed, which would drive borrowing costs for the heavily F/X indebted Turkish banks and corporates. Brent is hoveri...