- Baz Ratner/Reuters
An attempted coup by a faction within the Turkish armed forces calling itself the Peace at Home Council failed in less than 24 hours over the weekend after Turkish President Recep Tayyip Erdogan called on his supporters to take to the streets to protest the uprising.
The Turkish lira plunged by over 5% as news of the attempted coup crossed the wires late on Friday, reflecting investors’ immediate concerns about the situation. That had the currency within 0.6% of its all-time low against the US dollar.
But the currency has since recovered some of its losses, rising by as much as 2.0% against the US dollar at about 7:30 a.m. ET on Monday, providing yet another example of markets (at least partially) bouncing back after geopolitical shocks.
Still, though the market losses weren’t that severe, there could still be some economic ramifications for Turkey if investors continue to feel jittery about the country’s political situation going forward.
- Capital Economics
“Looking beyond the next six-to-twelve months, the economic repercussions will depend on the political fallout,” Capital Economics senior emerging-markets economist William Jackson said in a note to clients.
“At this stage, the situation is still highly uncertain, but the initial response seems to be clampdown and even greater centralization of power under the presidency. We will be watching closely for any sign that President Erdogan tries to push ahead with long-held plans to amend the constitution in order to formalize stronger powers for himself (and potentially erode checks and balances).”
In particular, Jackson notes that investors’ fears over political turbulence in Turkey could discourage capital inflows from abroad.
And that would be a problem because Turkey relies heavily on foreign investment to finance its large account deficit – about 4% of gross domestic product, according to June data cited by Capital Economics – and roll over external debt.
- Capital Economics
A drop of inflows could lead the external shortfall to narrow via lower imports and could lead to a depreciation of the lira to reduce the price of domestic assets and attract more foreign funding, he said.
For what it’s worth, HSBC economist Melis Metiner also noted that his team’s top concern with Turkey was its external account balance, which the team expects to hit 4.4% of GDP this year amid increased political risk.
“The key point from an economic perspective is that Turkey has a low domestic savings rate, making the economy reliant on capital from overseas to finance investment and improve the capital stock,” Jackson argued. “That in turn requires a stable and predictable political environment and improvements in the business environment.
“It’s notable that the improvements in governance seen in the early 2000s coincided with faster and steadier growth, as well as lower inflation, compared with the politically-tumultuous 1980s and 1990s,” he continued.
“The current direction of Turkish politics implies a slower and more volatile growth path.”
Another thing that could get whacked is Turkey’s tourism sector, which has already had a difficult half-year following Moscow’s suspension of visa-free travel after a Russian military jet was shot down along the border between Turkey and Syria in November.
“Despite recent rapprochement with Russia, tourist arrivals are likely to take a further hit, pointing to possibility of slightly larger current account deficit by year-end,” a Deutsche Bank team led by Kubilay M. Öztürk wrote.
- Deutsche Bank
The team continued:
“For now, we still work with a 15% decline in annual foreign tourist arrivals (versus 7% in January- May), translating to a current account deficit to the tune of 4.5% (of GDP) this year. However, risks are obviously tilted to the upside right now. Our worst case scenario is a 40% fall in 12-month rolling foreign tourist arrivals by year-end, which translates to a 40% fall in tourism revenues versus 2015 and USD~6bn of additional financial requirements compared to our base case (-15%YoY).”
It’s also interesting to consider the situation in Turkey with respect to how investors think about other emerging markets and their political situations.
“At a broader level, events in Turkey also highlight the possibility of local political risks being overlooked in other emerging markets,” a Credit Suisse team led by Berna Bayazitoglu said in a Sunday note to clients.
“We are particularly concerned about South Africa, where we believe the post-Brexit rally in the rand should now start to reverse,” the team added. “Political tensions with the ruling ANC party have been escalating under the radar ahead of municipal elections on 3 August.”