M&G: Dismissal of the Governor of the Central Bank of Turkey undermines investor confidence
M&G: Dismissal of the Governor of the Central Bank of Turkey undermines investor confidence
The resignation of the Governor of the Central Bank of Turkey, Naci Agbal, has evoked a negative reaction in the financial markets that will damage investor confidence in Turkey for years to come, according to the bond team of British asset manager M&G.
The dismissal of the Governor of the Central Bank of Turkey (the third in less than two years) has come as a clear negative surprise to markets. Governor Agbal’s appointment last November was taken positively by investors, following the unsustainable financial policies under his predecessor. These previous policies led to high inflation and significant FX reserve depletion, making the Turkish Lira one of the worst-performing currencies across EM in 2020. During his four-month tenure at the helm of the central bank, Governor Agbal managed partially to restore investor confidence: Turkish asset prices improved, the local dollarization trend slowed and foreign investors started their tentative return to local markets. Consequently, his dismissal in favour of a candidate with a political background and somewhat unorthodox economic views seems to represent a significant setback, likely indicating a return to the previous unorthodox policy mix.
While the low point of the COVID crisis is likely behind us, Turkey’s fundamental economic challenges have not disappeared. High inflation, sizeable external financing needs amid low FX reserves, an increased share of FX-denominated public debt and an absence of structural reforms have left Turkish markets at the mercy of global investor sentiment. The sharply negative market reaction underscores investor concerns: unless the new Governor somehow manages to preserve policy continuity, which appears unlikely at the moment, further weakness could follow. In any case, Governor Agbal’s abrupt dismissal is likely to inflict long-lasting damage to investor confidence in Turkish markets over the medium term. While contagion to other emerging markets has been fairly limited, this event serves as a reminder to investors of the policy fragility across many EMs, at a time of other challenges including slow vaccine distribution and rising US yields.