Turkish bonds fell for a third day and the lira weakened as an increasingly public power struggle between the president and prime minister threatened to revive the political turmoil that spooked investors last year.
The yield on 10-year government bonds jumped 16 basis points to 9.62% as of 2.04pm in Istanbul, the highest level in three weeks, taking the increase this week to 38 basis points. The lira weakened against the dollar a third day, heading for the lowest level since March. Prime Minister Ahmet Davutoglu was set to meet President Recep Tayyip Erdogan yesterday amid investor concern the president’s bid to take some powers from the premier could lead to a policy paralysis or even Davutoglu’s resignation. The ruling AK Party last week stripped Davutoglu of the ability to name local branch heads.
The meeting, originally scheduled for today, came less than a week after the ruling AKP party board stripped Davutoglu of the power to name local branch heads. On Tuesday, the usually soft-spoken premier angrily told AKP parliamentarians that he would reject “with the back of my hand, any job that a mortal would not think of leaving.”
Rising tension between the country’s two leaders is undermining confidence in the $720bn economy and comes at a time of mounting violence between government forces and the Kurdish PKK group as well as Islamic State militants.
People close to the two leaders have spoken of an unsustainable split in policy making. Erdogan, who served as prime minister for more than a decade until 2014, has transformed the typically ceremonial role of the president to a new centre of power. Davutoglu, his handpicked successor, is seeking to portray an image of an independent policy maker.
Investors “will be looking for the statement after today’s meeting. A statement on the elimination of snags between the president and the prime minister can calm down the markets. A statement in the opposite direction could deepen the uncertainty,” Is Yatirim, an Istanbul-based brokerage, said in a note.
Investors were set to watch the meeting for signs of renewed political risk in Turkey. The spat is compounding a selloff in emerging markets that gathered pace after US Federal Reserve officials indicated a June interest-rate increase is still possible. Demand at a government bond auction yesterday fell to a June low.
“Markets will be keenly awaiting the outcome of this meeting,” Morgan Stanley analysts including Gordian Kemen wrote in an e-mailed report. They recommended investors sell the lira against South Africa’s rand.
The currency traded 0.5% lower at 2.8639 per dollar. The Borsa Istanbul 100 Index was poised for the longest losing streak since January. It dropped 2.2%, led by a 5.6% slump in Turkcell Iletisim Hizmetleri AS, the nation’s largest mobile operator.
Turkey’s then-Prime Minister Tayyip Erdogan (right) and then-Foreign Minister Ahmet Davutoglu greet their supporters as they leave Friday prayers in Ankara in this photo taken on August 22, 2014. Rising tension between the country’s two leaders is undermining confidence in the $720bn economy.
