Turkey’s ban on Twitter has taken international opinion of its authoritarian prime minister to a new low on the eve of a vote that could determine his political future, reports Delphine Strass, Financial Times.
But despite the country’s febrile politics, slowing economy and continued uncertainty over the outlook for emerging markets, foreign investors who have shunned Turkey for much of the last year may be ready to venture back.
In the last week, Turkish assets have rallied, with the main equity index rising to its highest level since early January, yields on the two-year benchmark government bond at their lowest since early March and the lira up 1.7 per cent against the dollar.
The optimism is something of a surprise, since no one expects Sunday’s local elections to resolve the polarisation of voters and the feuding between the AKP and its former Gulenist allies that has paralysed Turkey’s institutions in recent months. They are rather a prelude to the summer’s more important presidential poll.
Yet investors are betting that Recep Tayyip Erdogan will emerge with his grip on government intact – even if his popularity is diminished by the stream of corruption scandals and his chances of winning an executive presidency receding.
If he does survive the vote more or less unscathed, investors will “hold their noses and jump back in,” says Tim Ash, an economist at Standard Bank.
Some who have been underweight on Turkey for months are already “beginning to dip their toes back in,” according to Manik Narain, a strategist at UBS, who says the hope is for a period of policy continuity, with a chastened Mr Erdogan playing it safe.
Yarkin Cebeci, economist at JPMorgan, argues that the most market-friendly outcome would be for the AKP to win about 40 to 45 per cent of the vote, because “a weaker performance would increase the risk of early elections and the fragmentation of voter preferences, while a stronger performance could result in concerns over more authoritarian governance by the AKP”.
The recent rally, then, is hardly an expression of confidence in Turkey’s governance. The lira may have stabilised in recent weeks, but it has still lost more than 17 per cent of its value against the dollar and 23 per cent against the euro in the last year – the worst performance of any major currency except the Argentine peso.
In contrast, the Indian rupee and Indonesian rupiah – grouped with the lira last year among the “fragile five” currencies most vulnerable to the US Federal Reserve’s withdrawal of stimulus – have gained steadily this year on hopes that elections will usher in reform-orientated governments.
Yet market concerns over Turkey’s reliance on foreign capital inflows have eased since the central bank raised interest rates aggressively in January to stem a slide in the currency. Both nominal and real interest rates are now high enough to attract fixed income investors, who also expect Turkey’s current account deficit to narrow in 2014 as growth slows and as the economy rebalances.
Mr Ash notes that Turkey could benefit if the threat of sanctions causes investors to pull out of Russia, and says the lira could also gain if Turkish households – who have been hoarding dollars in recent months – regain enough confidence to switch savings back into lira-denominated accounts offering higher interest rates.
Equity investors are also pinning their hopes on the central bank’s revelation that policy makers are considering paying interest on the reserves banks are required to hold in lira, in order to boost liquidity and counter an economic slowdown.
Shares in banks jumped almost 7 per cent on Wednesday after the government cleared the way for the central bank to do this. It had stopped paying interest on lira reserves in 2010, when emerging markets were flooded with global liquidity.
Yet despite all this, Turkey could once again appear vulnerable if sentiment turns against emerging markets, which have been surprisingly resilient given the concerns over a Chinese slowdown, signs that US interest rates could rise earlier than expected and continuing geopolitical tensions with Russia.
“The perception is that Turkey is not Russia, and AKP will find a way to keep winning elections and steer Turkey away from calamity,” write analysts at the consultancy Global Source Partners. But they predict that any rally after Sunday’s vote “will be a three-week rally at most. Then the realisation will set in that elections have not solved any problems in Ankara and Erdogan remains . . . well, Erdogan”.