(Updates market performances in sixth paragraph.)
Jan. 23 (Bloomberg) -- In a London hotel that featured in an early Sherlock Holmes story, Turkey’s finance minister is preparing to tell investors that the graft scandal roiling his country’s financial markets is a case of mistaken identity.
“There is a campaign against the government in the disguise of corruption investigations,” Mehmet Simsek said in the tea room of the Langham Hotel, where he was drinking hot chocolate with a group of advisers. They were polishing a pitch to be delivered to money managers in the U.K. capital, and later this week in the U.S., making the case that the turmoil won’t unseat Turkey’s government or derail its economy.
The lira has slid to a record low and stocks and bonds slumped as allegations of bribery and rigged tenders drove four of Prime Minister Recep Tayyip Erdogan’s ministers from office. Simsek, 47, said the turmoil poses no threat to Erdogan’s 11- year rule and he’ll emphasize that at the London and New York meetings.
“The key message to investors is that political stability is not at stake,” he said. “Downside risks to growth have risen, but because the fundamentals are still sound, assuming we get political clarity with local elections in March, I think the economy will pick up.”
Erdogan says the corruption probe is part of an attempt to weaken his government before that vote, which will be followed by a presidential ballot in August. He blames the followers of Fethullah Gulen, a U.S.-based Islamic cleric, and has vowed to eliminate what he calls their “parallel state,” reassigning thousands of police officers and removing top prosecutors.
Turkey’s main stock index has fallen 23 percent in dollar terms, the worst among 94 primary indexes worldwide, since news of the inquiry broke on Dec. 17. The lira has dropped 12 percent. Yields on benchmark two-year bonds closed at a two-year high of 10.49.
Turkey’s economy has grown about 5 percent a year under Erdogan and attracted record flows of foreign capital. Simsek, a former economist at Merrill Lynch in London, is one of the few members of his cabinet who can address investors in their own language.
He spoke in a Jan. 20 interview at the Langham, where a European monarch is holed up in disguise in order to consult Holmes in “A Scandal in Bohemia,” one of the rare stories in which the detective, Sherlock, is outwitted.
Simsek says current market levels reflect a perception that “Turkey seems relatively more vulnerable.” The minister said that’s likely to change.
“Ultimately you cannot have a sustained disconnect between fundamentals and prices,” he said. “People will start to look at medium, long-term fundamentals, and I think on that basis Turkey is still a compelling story.”
Economic growth increased to about 4.5 percent in the second and third quarters of last year. Morgan Stanley cut its forecast for 2014 to 2.9 percent last week, citing the political tensions. Goldman Sachs Group Inc. says the economy will probably grow about 2 percent this year, the slowest pace since a 2009 contraction, and 1.8 percent in 2015, according to economic forecasts published today.
Simsek said the lira’s decline, coupled with economic recovery in Turkey’s main trade markets in Europe, will help bring about a “substantial correction” in the country’s current-account deficit, described by the minister as a “soft spot.”
With a budget deficit forecast at 2.3 percent of gross domestic product this year, Turkey also has “room to respond to these shocks” through fiscal policy, he said.
Domestically, he predicted that any slowdown caused by the corruption probe will prove temporary. While consumers and entrepreneurs may put spending plans on hold, “if we get clarity on the political front, as expected, then chances are that they will move on.”
Opinion polls show support for Erdogan’s Justice and Development Party at about 47 percent, Simsek said, little changed from the 50 percent it won in the 2011 parliamentary vote. He said that even at 42 percent support in the local elections, the party would have enough votes to eventually ensure a single-party government.
Among those detained since Dec. 17 are the chief executive of a state-run bank, the head of Turkey’s biggest real estate company, and the sons of three cabinet ministers.
Opposition parties say Erdogan’s overhaul of the police and judiciary after the inquiry are an attempt to mask corruption and centralize power. The European Union, which Turkey is a candidate to join, has said it’s concerned about the rule of law and separation of powers.
Simsek said the government isn’t trying to cover anything up.
“Anybody who’s corrupt or has been involved in corruption should face the full force of the law,” he said. “But it has become very clear now that quite a lot of evidence has been fabricated, and there is a political motivation.”
Turkey’s bank kept its three main interest rates on hold on Jan. 21, resisting calls from economists for an increase to shore up the lira, which extended its decline after the decision. Economists at Royal Bank of Scotland Plc said the move was “disastrous” for the bank’s credibility and showed it “has its hands tied behind its back by politicians.”
Simsek suggested that any moves by the central bank might have been weakened in the current political environment.
“The problem isn’t about the economy, the turmoil is caused by politically motivated investigations,” he said. “So, economic measures won’t be effective at this stage. The Turkish nation will provide clarity on March 30.”
Erdogan and allies say an “interest-rate lobby” of financial institutions that profit from high borrowing costs is involved in the effort to destabilize the government. Economy Minister Nihat Zeybekci said the state had no intention of raising interest rates on Jan. 20, a day before the central bank’s monthly rates meeting.
Simsek acknowledged that there is criticism of the central bank’s complex monetary policy, which disavows interest rate increases in favor of a flexible rates corridor and macroprudential measures, implemented in concert with other regulators, that include limits on credit-card consumption. He said that these alternative measures were what Turkey’s current account deficit needed.
“Many investors would like to see a more orthodox monetary policy,” Simsek said. “But the world, including Turkey, we’re faced with multifaceted challenges.”
--Editors: Benjamin Harvey, Ben Holland