Investors Assessing Turkey in 2017 Must Weigh These Six Things

  • Country may face a fourth volatile year: Blackfriars
  • Constitutional referendum looms large on investors’ radar

At the end of 2015, investors, analysts and company executives said the worst was probably over for Turkey after two tumultuous years. They were wrong.

Unforeseen turbulence was unleashed on Turkish markets during 2016 by a failed coup, terror attacks, the loss of an investment-grade rating and record weakness in the lira. Add external shocks from unexpected voting outcomes in the U.K. and the U.S. and it’s clear that money managers and analysts are cautious to avoid the same mistake again in their predictions for 2017.

“It looks like it will be the fourth volatile year, with a lot of uncertainty,” said Anastasia Levashova, a money manager at London-based Blackfriars Asset Management Ltd. The first six months will be dominated by a referendum on presidential powers, efforts to resolve the Syrian conflict and U.S. policies. If there were favorable developments on these questions, “we have the chance to get some more clarity and less volatility by mid-2017,” she said.

Here are the events and issues that will be critical for investors in Turkey next year:

1. An Executive President?

For Ogeday Topcular, a money manager at Geneva-based RAM Capital, a potential constitutional referendum on changing Turkey’s political framework to a presidential system from a parliamentary one, will be the key factor in the first six months.

Lawmakers are expected to decide early in the new year whether to allow a public vote on the governing party’s proposal for an executive presidency. Such an amendment to the constitution would allow President Recep Tayyip Erdogan, criticized for his sway over the ruling AKP and increasingly authoritarian style, to restore his ties to the party.

“If it is a ‘yes’ vote, it would be unchartered territory for Turkey and for its future,” Topcular said.

2. The Economy

The 1.8 percent contraction in the third quarter was the first since 2009, during the global financial crisis. Slow growth in 2017 is essentially “unacceptable” for Turkey, according to Burak Kanli, chief economist at Istanbul-based Finans Invest.

“The implications for company earnings, debt levels and employment will be inevitable,” Kanli said by phone. “It’s important to gauge how serious the slowdown will be to monitor those repercussions, as Turkey’s demographic background is not able to handle slow growth.”

The mix of a slowing economy, weaker currency and above-target inflation is complicating efforts to find the right policies to attract investors to Turkish assets.

3. Syrian War Resolution

Turkey is fighting wars on three fronts: in Syria; against the Kurdish separatist PKK movement; and with supporters of U.S.-based Islamic cleric Fethullah Gulen, who Erdogan says runs a terrorist network in the country. The resolution -- or even de-escalation -- of any of these conflicts may convince investors that a key concern has been at least partially addressed.

Turkey’s risk premiums may be eased when long-awaited talks on Syria begin, with the implications of any resolution critical for investors, said Levashova. “What will be the result for the Kurds? Will Erdogan’s rhetoric against the Kurds loosen after a Syria resolution? That will be where we will be looking.”

4. Fitch Review

A Fitch Ratings Ltd. downgrade of Turkey’s BBB- score when it reviews the sovereign rating in 2017 would inflict a blow to the financial industry.

A cut to junk would shave 110 to 120 basis points from bank capital-adequacy ratios, according to Unlu Menkul Degerler A.S, hampering their ability to lend. Banks use Fitch to calculate their risk-weightings on foreign-exchange reserves kept at the central bank and their non-lira securities.

The banking regulator could counter the effects of this by limiting higher risk weightings to reserves on foreign-exchange liabilities, Vedat Mizrahi, Unlu’s head of research, said by e-mail. “Such a decision would eliminate capital-adequacy ratio erosion to a great extent.”

5. Trump’s Administration

Donald Trump’s election as president has prompted investors to pull money from emerging markets because of concerns that the U.S. will adopt more protectionist trade policies that would harm developing country economies.

“Global markets will be able to test whether Trump’s rhetoric of protectionist trade and supportive fiscal measures will translate into action, or not, once he takes office on January 20,” economist Fatih Keresteci said in a note sent by Istanbul-based HSBC Bank AS. While views expressed during Trump’s campaign may materialize as policy, the possibility has caused uncertainty among investors, according to Keresteci.

Confirmation of protectionist laws may spur further investor withdrawals from emerging markets, including Turkey -- a particular concern as the country relies on foreign inflows to finance its current-account deficit.

6. Turkey-EU Relations

Relations with the European Union, Turkey’s biggest trading partner, have deteriorated after more than 100,000 public employees, judges, academics and journalists were arrested, detained or suspended from their jobs in a crackdown following the failed July 15 coup. When the European Parliament called for a halt to EU membership talks with Turkey in November, Erdogan hit back by threatening to allow refugees to enter Europe.

Discussion since then of a revised customs deal underscores the significant scope for improvement in trade between the EU and Turkey, according to Rabobank strategists Elwin de Groot and Stefan Koopman. “However, in light of recent political events and the ongoing soured relationship, the move has the looks of an olive branch. The branch, however, is one with strings attached.”

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