Turkish lira eases on uncertainty over cabinet roles

The lira slipped after the deputy prime minister's job was handed to a close ally of President Tayyip Erdogan

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Turkey's lira slipped on Friday amid uncertainty over who would have the upper hand on economic policy in a new cabinet after a deputy prime minister's job was handed to a former economics professor and close ally of President Tayyip Erdogan.

The new cabinet announced by Prime Minister Ahmet Davutoglu keeps key members of the economic management team in place, including Deputy Prime Minister Ali Babacan and Finance Minister Mehmet Simsek, widely respected by financial markets.

But the appointment of Numan Kurtulmus, deputy chairman in charge of economic affairs in the ruling AK Party, as a deputy premier alongside Babacan unnerved some analysts, raising fears of a power struggle over economic policy.

Listing priorities shortly after his appointment, Kurtulmus said Turkey needed to embark on constitutional reform, advance a Kurdish peace process and establish "a new economic programwith the determination to increase our economic power".

It was not immediately clear whether he would have any responsibilities for the economy in his new role. He said the portfolios for the four deputy prime ministers would be made clear at the first cabinet meeting, expected in the coming days.

"Kurtulmus' responsibility as deputy prime minister has not been announced, yet his presence may influence economic management in implementing more accommodative economic policies," Deniz Cicek, an economist at Finansbank in Istanbul, said in a note to clients.

Erdogan has long championed sharp cuts in interest rates despite stubbornly high inflation. Cicek said Kurtulmus argues for the central bank aligning its policy stance with that of the government.

Another strategist at an Istanbul bank also said nervousness about who would wield influence in the cabinet was weighing on Turkish assets, although other traders said an afternoon sell-off was due more to global risk aversity and a shift in trading positions ahead of the weekend.

A narrower-than-expected trade deficit in July lifted the lira to 2.1536 against the dollar earlier on Friday, but it slipped back to 2.1619 by 1305 GMT.

Stocks also fell, with Istanbul's main share index reversing earlier gains, falling 0.21 percent to 80,670.90 points and under performing a 0.03 percent fall in the broader emerging markets index.

The benchmark 10-year government bond yield fell to 9.14 percent from 9.19 percent on Thursday.

Trade deficit narrows

Markets had been pricing in a largely unchanged economic team and the focus appeared to turn elsewhere once confirmed.

"After their expectations were realized, traders turned to uncertainties surrounding geopolitical risk in the area and ECB (European Central Bank) easing," said Erkan Dernek, strategist at Odeabank in Istanbul.

Trade data out in the morning offered some support. In July, the trade deficit was $6.46 billion, below a Reuters poll forecast of $7.41 billion. Exports rose 2.6 percent to $13.4 billion and imports fell 13.5 percent to $19.9 billion, data from the Turkish Statistics Institute said.

In the first seven months of the year, the trade deficit fell 24 percent to $46.07 billion.

"Decrease in the foreign trade deficit is important as it indicates the declining path in current account deficit is to continue," a note from Odeabank said, cautioning: "Weakness in the imports highlights the weakness in domestic demand".

Turkey's current account deficit is financed by foreign capital inflows, making it especially vulnerable to global liquidity conditions. Eliminating this weakness in the economy has been a major policy objective for the ruling AK Party.

Among key sectors, automotive imports tumbled 23.8 percent in July while electrical machinery exports dropped 10 percent.

Exports to Iraq - the second biggest importer of Turkish goods and services before Islamist militants seized a third of the country in a bid to carve out a hub for jihadism - plunged 45 percent in July compared to a year ago.