Hard-hit Turkish assets hinge on election, Trump-Erdogan meeting
Investors could snap up sold-off Turkish assets or dump them
with force depending on the outcome of Sunday’s re-run election in Istanbul
and, days later, a high-stakes meeting between President Recep Tayyip Erdogan
and his US counterpart Donald Trump.
The Turkish lira, stocks and bonds have sagged since March
amid uncertainty over how the vote might affect Erdogan’s economic policies,
and strained relations between Ankara and Washington over Turkey’s purchase of
Russian S-400 defense systems.
The outcomes may set the stage for a rebound or a further
slump in the lira by the end of next week, bankers and analysts say. The
currency has lost 10% against the dollar so far this year, following a 30% fall
in last year’s currency crisis.
The stock market, at its lowest levels in dollar terms in
about a decade, might revive after the Istanbul election if foreign investors
regain trust in Turkey, said Mehmet Gerz, who heads Ata Portfoy fund management
firm.
When the initial March vote was scrapped, investors
questioned the integrity of Turkey’s democratic institutions and wondered
whether the months of additional campaigning would distract from needed
economic reforms.
A slew of unorthodox government measures to protect the lira
raised further questions.
“Turkish stocks are at the cheapest level in a decade,” Gerz
said, adding “the political framework that will be formed after the election”
would set the new direction.
On March 31, the main opposition party pulled off a mayoral
victory over Erdogan’s ruling AK Party, a stinging defeat for the president
seen in part as a rejection of his handling of the economy that tipped into
recession last year.
Another AKP loss on Sunday could weaken his iron grip on
power, but also restore some faith in democracy. Concerns over the central
bank’s autonomy, as well as a separate diplomatic row with Washington, set off
last year’s lira plunge.
In May, when the re-run was announced, foreign investors
sold a net $345 million of Turkish stocks.
Compounding the pressure, locals have flocked to foreign
currencies since last year’s lira crisis, with forex deposits and funds
including precious metals held by Turkish local individuals and institutions
rising to a record high by June 7.
The trend could change, however, and confidence in Turkish
assets increase if reforms are put in place “to get back to rational and
rule-based economic management,” Gerz said.
SANCTIONS LOOM
Erdogan and Trump are set to meet at a G20 summit in the
Japanese city of Osaka on June 29-30, in part to discuss Turkey’s S-400s
purchase and the threat of US sanctions.
Investors have held out hope the leaders can find a solution
despite Ankara’s repeated assertions that it will accept delivery of the
defense systems and, in the US Congress, a strong resolve to punish Turkey if
it does and a US law requiring that sanctions would be implemented.
On Thursday Erdogan told foreign reporters in Istanbul that
he would ask Trump whether he thought such sanctions were suitable, adding: “I
believe he does not.”
US sanctions, which could come as soon as July, could set
off another bout of selling in the lira and other Turkish assets. But some
investors said much would depend on the details of such a move.
“The current view is that Turkey may not be facing heavy
sanctions but (rather) measured economic sanctions over the S-400 purchase.
This could create negative flows but I do not expect heavy sales,” said Eral
Karayazici, a fund manager at Gedik Portfoy.
But Ulrich Leuchtmann, head of forex and emerging markets
research at Commerzbank, said that Turkey would be “really hurt” if the US
enforces its sanctions globally.
“Optimists are saying this is just a lot of noise, it won’t
be that bad in the end. But I am not so sure about this,” he said.