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LONDON: Overseas money managers, wary of Turkish assets for months, reckon Sunday’s clear win for Tayyip Erdogan will tempt foreign investment back only when he clarifies election pledges to take a tighter personal grip on economic and monetary policy.

Erdogan emerged victorious from his biggest electoral challenge in 15 years, giving him the sweeping executive powers he has long sought and extending his grip on Turkey until at least 2023.

But Turkey’s large current account deficit, double-digit inflation and high external borrowing costs remain the main issues for the new cabinet. Investors also want to see if respected, business-friendly names will appointed — or if Erdogan will persist with his unorthodox policies.

“They have to prove to the investor community they will put economic stability at the top of the agenda,” said Salman Ahmed, chief investment strategist at Lombard Odier Investment Managers, which is underweight Turkish local currency bonds.

“That means more tightening of monetary policy, more fiscal reform and a roll-back of some of the very populist measures that were taken,” Ahmed said. “Unless we see more tangible signs of this, we are still very cautious on Turkey, as fundamentally they are still a weak country.”

However, when he spoke in London on May 15, Erdogan said the central bank would not be able to ignore signals from the new executive presidency. A self-described “enemy of interest rates”, Erdogan wants borrowing costs reduced.

“I will take the responsibility as the indisputable head of the executive in respect of the steps to be taken and decisions on these issues,” he said in an interview.

Investors reacted with shock and disbelief, and the selling already seen in Turkish assets accelerated. Turkish equities are now down 17 per cent for the year and hard-currency sovereign bonds have lost over 8pc. The lira has weakened 18pc since the start of the year.

Foreign investors, who hold around 64pc of Turkey’s listed equities according to the World Bank, have pulled money from Turkish shares for four consecutive months, fund flow data from the Institute of International Finance shows.

The outcome of Turkey’s elections was more clear-cut than expected, so the threat of fresh elections has been averted. Lira FX implied volatility gauges fell, with some almost halving and hitting the lowest since mid-May for all the one-month to one-year date ranges.

Turkish stocks and sovereign dollar bonds also rallied early on Monday, but failed to hold on to gains as investors assessed the tasks that lay ahead.

Markus Schneider, an emerging market economist for CEEMEA at Alliance Bernstein, said the victory gave Erdogan some scope to take a more orthodox stance.

Published in Dawn, June 26th, 2018