Turkish lira plummets after Erdogan fires central bank chief

The turmoil came after President Recep Tayyip Erdogan on Friday unexpectedly dismissed Naci Agbal, the central bank governor who had repeatedly raised interest rates in an effort to control inflation since his appointment in November. Foreign investors say the move has renewed concerns that the central bank has lost its independence from political influence, diminishing the credibility of policymakers and undermining the appetite for Turkish assets.

The new governor, Sahap Kavcioglu, tried on Sunday to reassure the markets saying that controlling inflation is the bank’s main objective. He also pledged to promote economic stability, reducing borrowing costs and spurring growth. Money managers are concerned about allowing the currency to devalue and accepting high levels of inflation to lower interest rates.

“We are really trying to assess the level of commitment to the lira,” said Simon Harvey, senior foreign exchange analyst at brokerage Monex Europe. “We know in Turkey that interest rates are politically sensitive.”

The Borsa Istanbul 100 stock index, Turkey’s benchmark, fell by 9.4% on Monday, putting it on course for its sharpest liquidation since June 2013 and triggering two trading interruptions. The Nasdaq-listed iShares MSCI Turkey listed fund fell 17.5% in the pre-market.

The turmoil in Turkey’s financial markets has highlighted the risks of investing in emerging markets, but has shown mild signs of overflowing for the time being. The Mexican peso and the South African rand fell slightly against the dollar.

Spanish bank BBVA’s shares fell more than 6% in Madrid. Turkey accounts for more than 10% of BBVA’s profit through its 49.9% stake in Turkish bank Garanti BBVA,

according to Jefferies.

The lira was one of the best performing emerging market currencies this year, with investors applauding recent interest rate hikes. Overseas money managers added $ 4.6 billion net to Turkish stocks and local currency bonds during Agbal’s term, betting that higher interest rates would help to limit inflation and stabilize the lira.

Before Agbal’s appointment at the central bank, investors sold Turkish assets for much of 2020, as low interest rates and high credit expansion increased imports. The currency weakened, leading to several rounds of intervention to stabilize the lira, even as investors speculated that the currency would continue to devalue. The central bank at one point sold its own reserves and those that were borrowed from domestic banks to such an extent that it owed more foreign currency reserves to the banks than it had.

Kavcioglu, the fourth head of the Turkish central bank in less than two years, is a former member of parliament for Erdogan’s Justice and Development Party and a columnist for the pro-government newspaper Yeni Safak. He publicly supported Erdogan’s preference for lower interest rates.

Agbal’s dismissal came in the wake of a Thursday rate hike that exceeded expectations and pushed loan rates from 17% to 19%.

The prospect of a new cycle of interest rate cuts under the Kavcioglu government is raising concerns about the country’s prospects.

The cost of insuring Turkey’s government debt against defaults rose sharply on Monday, rising to an annual cost equivalent to $ 476,000 for every $ 10 million in bonds under a five-year contract. This is more than $ 306,000 at the close of Friday, according to IHS Markit, and is the highest since the beginning of last November.

“It is the most complete surprise I can remember in more than 20 years of doing this job,” said Paul McNamara, chief investment officer at GAM Investments in London, which manages emerging market debt funds. He has bet on the appreciation of the lira in recent months through forward currency contracts, agreements to buy or sell a currency at a predetermined rate on a specific date.

McNamara said he expects high volatility in the lira this week, while he and other investors are looking for more clarity on Kavcioglu’s policies.

Some investors were also concerned that Turkey would restrict its ability to sell local assets to contain market turmoil. Lütfi Elvan, Turkish Minister of Finance and Treasury, issued a statement Monday indicating that Turkey would not impose capital controls or set a fixed exchange rate.

Any cuts in interest rates cannot be made immediately. In Kavcioglu’s statement on Sunday, he said the timetable for monetary policy meetings, where benchmark rates are set, would remain unchanged. The next meeting would be on April 15.

“If you’re committed to the meeting schedule, then you don’t have a meeting this week to cut interest rates, so there’s a brief extension for investors,” said Kieran Curtis, manager of emerging markets funds at Aberdeen Standard Investments who had bought bonds denominated in lire during Mr. Agbal’s term.

“The next move will definitely be low,” added Curtis. “The question is, when are rates going to fall and how far.”

—Joanne Chiu, Jared Malsin and Paul J. Davies contributed to this article.

Write to Caitlin Ostroff at [email protected]