Turkish markets bounce as PM Davutoglu steps down, Erdogan concerns remain

Turkish Prime Minister Ahmet Davutoglu has stepped down amid growing tensions with President Recep Tayyip Erdoğan, raising concerns of a further shift towards authoritarian policymaking in the country.

After just 20-months in office, Davutoglu announced his resignation in a move that is feared will allow Erdogan to not only solidify his position and possibly grab even more power.

Davutoglu, who met with Erdogan on Wednesday evening, said he would step down as head of Turkey's ruling Justice and Development Party in order to allow a new leader to take charge at an extraordinary congress on 22 May.

At Wednesday's meeting it was reported the now-departing PM demanded, it seems unsuccessfully, more autonomy aftet tensions between the two had bubbled to toxic levels.

Reports earlier on Thursday from the AFP news agency said Davutoglu will not seek a new mandate at the forthcoming congress, a fact the outgoing prime minister confirmed that during a later press conference.

"It’s still early days, but it’s likely to mean Turkish markets are in for a choppy ride in the coming days and weeks," said William Jackson at Capital Economics.

"And the resurfacing of political risk on investors’ radar serves as a reminder that the longer-term outlook for the Turkish economy isn’t as rosy as some seem to think."

Economists said Erdogan had been irked by Davutoglu’s reluctance to push through a new constitution, which is high up among the President’s priorities, following clashes on other issues such as pre-trial detentions, the relationship with the EU and the appointment of the central bank governor.

The Turkish lira dropped by around 4% against the US dollar on Wednesday and regained almost half of lost ground on Thursday, while the Istanbul stock market is down by 9% over the past few days. On Thursday the main BIST index was flat by 1320 London time as the morning's losses were erased.

"Concerns centre on the fact that the relatively moderate, conciliatory and well-respected Davutoglu is being pushed aside, probably to be replaced by someone more malleable by increasingly-authoritarian President Erdogan. Reports that Mr. Erdogan could appoint his son-in-law, currently Energy Minister, don’t help in this regard," said Jackson.

In particular, he said markets were likely to be worried by Turkey adopting Erdogan's new constitution to strengthen the powers of the presidency and which in turn might lead to more vocal demands on the central bank to lower interest rates to boost growth.

"That would, however, undermine the central bank’s inflation targeting credentials and its independence. Both of these would deter investment into the country, which is badly needed to finance the large current account deficit."