Speculation that Turkish Deputy Prime Minister Mehmet Simsek—viewed as an important voice of economic orthodoxy in Turkey’s government and a possible moderating influence on populist President Recep Tayyip Erdogan—had resigned gave the Turkish lira (TRY) another torrid day on April 5, sending it to a fresh all-time low against the dollar of 4.0473. That’s significantly past the psychologically important barrier of 4.0 and compares to the 4.0020 the currency finished on at the end of April 4 and the previous record low of 4.0361 recorded on March 23.

Fears over the future of former Merrill Lynch and UBS banker Simsek combined with growing domestic economic strains—including sticky double digit inflation, one of the world’s worst current account deficits, worries over an overheating economy and corporate debt bubble and concern that Erdogan may be undermining the independence of the central bank, which many analysts say should have acted by now to address the economic situation with substantial monetary tightening—and threatening international factors—such as consternation over the prospect of a US-China trade war and Turkey’s worrying exposure to US Fed rate hikes that very probably lie ahead.

Traders were unnerved by reports in the Turkish media that Simsek, who is in charge of the government’s economic management team, had tendered his resignation. Responding to the reports, Ibrahim Kalin, Erdogan’s official spokesman, said that the claim was merely “an allegation”, adding that he had no information about the issue. But as the day wore on the Financial Times reported two government sources as saying Simsek remained in his job and the deputy PM wrote on Twitter: “[My] efforts continue to be among those who strive to serve the nation and work until our last breath to build our beautiful Turkey.”

Analysts then chewed over the likelihood of Simsek having handed in his resignation before being persuaded to stay in return for certain assurances.

Coded attack
It was the name of Simsek that sprung to many minds last week when Erdogan made a coded attack, during which he hit out at the rating agencies for “making statements against our country”. As a counterweight to the president, Simsek is appreciated for his willingness to hear out the concerns of international investors. Erdogan was scathing of Moody's Investors Service after on March 8 it cut Turkey's credit rating further into junk, two notches below investment grade.

According to an April 5 report in Hurriyet, Erdogan attacked a recent interest rate hike at a closed-door meeting of his ruling Justice and Development Party (AKP) this week. "Before I went abroad, we had a meeting about interest rates. We talked about lowering [rates]. Then when I was abroad, the central bank raised interest rates," he reportedly said, seemingly referring to the 50 basis-point hike the regulator introduced for the highest of its four interest rates last December 14.

"We take a decision and they don't implement it. They’ve done this behind my back," he was further cited as saying.

Erdogan is a self-described "enemy" of interest rates. Pushing unconventional economic thinking, he has repeatedly called on the central bank to lower borrowing costs to boost the economy despite high inflation and the plight of the lira. At the weekend, during a series of speeches, the president was back on the warpath against “evil” voices pushing for higher interest rates to curb inflation.

Timothy Ash, an analyst at Bluebay Asset Management, said that if it was correct that Simsek had been given assurances in order to persuade him to stay as deputy PM then it would be important to see what they would mean for the course of economic policy. “Sense we are approaching a key turning or inflection point,” he said in an emailed note.

Simsek, sometimes seen as the last market-friendly member of the cabinet, on March 23 warned private sector companies over their FX debts, saying the government planned to introduce a debt limit for real sector companies.

Turkey is currently awaiting a new stimulation package which may be released within two weeks. It will aim at spurring growth performance and cutting interest rates. The government fuelled growth in 2017 through a TRY250bn (€62bn) credit guarantee fund (CGF) and it is expected to extend stimulation policies into 2018 despite the warnings of economic overheating.

Guillaume Tresca, a Paris-based strategist at Credit Agricole, told Bloomberg that “in a deteriorating environment for Turkey it [the Simsek speculation] doesn’t come at the right moment”. He added: “Clearly sentiment toward Turkey is negative. All the clients I have met recently have been negative on the lira.” He cited inflation as “getting out of control” and a central bank behind the curve.

Analysts, however, remain divided on what it would take to prompt the central bank to raise interest rates at its next policy meeting, scheduled for April 25. In recent days, leading analysts have cited lira/dollar rates between 4.05 and 4.25 as the possible trigger-point.

By around 17:15 Istanbul time, the TRY had very slightly trimmed its losses to 4.0417 against the dollar.