WOOD Flash – Turkey macro: another Central Bank governor change

Late on Friday (19 March), the Governor of the TCMB, Naci Agbal, was replaced by Sahap Kavcioglu. The incoming governor has released a statement, re-emphasising the commitment to lower inflation. This change of leadership at the central bank comes at the cost of credibility, and is likely to weigh on the TRY in the coming week. That said, the positioning of non-residents in the local financial market is very low, at 9.8 percentage points, below the October 2018 level, for local bonds, and USD 5.8bn lower for equities relative to 2018 (looking at non-resident holdings net equity transactions). Lighter positioning, a likely improvement in the current account in the coming months, and our view that US yields have overshot fundamentals and should fall in the next six months lead us to believe that the turbulence that is ahead for Turkey, as a result of this move, should be more contained than earlier episodes, but its effect will be felt over the medium term: via higher average inflation, a weaker TRY path and less scope for bringing interest rates lower, even amid favourable conditions.