Erdogan's VIP Visit to Brussels Backfiring Adds to Turkish Gloom

  • Syria's conflict is increasingly on investors' radar
  • EU will be even less open to accept Turkey: Aberdeen's Szabo

President Recep Tayyip Erdogan, on the first official visit by a Turkish head of state to Brussels, didn’t get the reception many in the country were hoping for.

His demands, including support for a "safe zone" in Syria, went unmet and European Union President Donald Tusk, without specifying a country, lashed out the next day at the use of the refugee crisis by neighboring nations as “a political bargaining chip.” Europe’s offer of 1 billion euros ($1.1 billion) to help Turkey shelter new arrivals is dwarfed by the $7.8 billion costs of harboring 2 million Syrians cited by Erdogan.

While the lira and Turkish bonds rallied with the rest of the emerging-markets world on the delay to U.S. interest rate increases, some investors are seeing more reasons to stay out of one of the worst-performing markets as the refugee crisis adds to concern over repeat elections, a Kurdish insurgency and a weakening economy.

Below are the views and strategies of six investors, analysts and economists following the talks:

Viktor Szabo, a money manager who helps oversee $12 billion of developing-nation debt at Aberdeen Asset Management Plc in London:

“$1.1 billion in aid to Turkey is not enough to provide a long-term solution for the refugee crisis. Turkey wants safe zones to be established in Syria and that would require a significant military push, one which the EU is not ready for. Thus, just providing financial aid for refugees will not be enough to help ease geopolitical risk for Turkey. Turkey remains in a nasty neighborhood, and the EU will be even less willing to take Turkey aboard after this influx of refugees. Any equation in the region that may benefit Turkey’s appeal should also involve reconciliation with Kurdish population.”

Philippe Dauba-Pantanacce, senior Middle East, North Africa and Turkey economist at Standard Chartered Plc in London :

“Foreign investors pricing Turkey risk are mostly focused on the repercussions of the unrest in the Kurdish provinces and how it ties to the elections. The growing threat of contagion from the Syrian conflict -- and the recent face-off with Russia -- is also increasing on Turkey’s investors’ radar. These concerns outsize the deal with EU on the refugee situation.”

Lutz Roehmeyer, who oversees $1.1 billion in emerging-market debt as director of fund management at Landesbank Berlin Investment and has held an underweight position on Turkey for the past five years:

“Turkey would benefit only after the Syrian war as the situation stabilizes and costs to the country decline with the return of refugees. The main point for foreign investors looking at coming back to the Turkish market is the expectation that the returns on Turkish assets will be much bigger than the loss on the future currency depreciation. We are not at that turning point right now. A tempting bond yield level would be 15 percent or more, no matter what the maturity is, until the risk perception declines a little.”

Nigel Rendell, a senior emerging-markets analyst at Medley Global Advisors LLC in London:

“Turkey and the EU understand that something needs to be done. It would be a humanitarian initiative, which would be welcomed by all. But I’m not sure it will have much impact on geopolitical risk -- the problem in Syria persists and Russian involvement is raising geopolitical tensions. In addition, we have the PKK issue plus of course the Turkish elections.”

Gregory Saichin, the chief investment officer for emerging-market fixed-income at Allianz Global Investors Europe GmbH:

“Execution is really key here. Turkey has been engaged in this humanitarian crisis for a while, received a substantial number of refugees. This agreement appears to reinforce (and potentially partially fund) the current action on the ground. On Russia’s active involvement in Syria, geopolitical pressure is on the rise. That said, Russia’s five-year CDS is down 40 basis points to 340 since the end of September. Turkey is down 47 basis points to 281 for the same period. So effectively, the market does not seem to have priced in at all these pressures. At this stage, we are cautiously looking at the Turkish elections but we feel that the likelihood of a similar outcome is high and bound to put pressure on Turkish spreads.”

Wolfango Piccoli, managing director at London-based political risk consultancy firm, Teneo Intelligence:

“I doubt this will have much of an impact on Turkey’s sovereign risk. The key drivers are domestic and related to political uncertainty, policy paralysis, the end of the Kurdish peace process. Turkey’s current political trajectory is undermining financial stability and growth while not tackling deep-seated structural weaknesses. A possible deal between Ankara and the EU over the refugees is unlikely to solve the matter. At best, it would be another incremental step, whose impact on the refugee flow will be short-lived. It is hard to see how they can reach any meaningful deal over such a controversial and intricate matter.”