The President of Turkey, Recep Tayyip Erdogan, has said he will purge state institutions of the ‘virus’ behind a failed coup by the Turkish army in the country on July 16.
Bridges were blocked, fighter jets flew over the capital and the armed forced announced martial law, while also preparing a new constitution. However, without wider military support or public backing, the coup failed and the groups of soldiers involved began to surrender.With Turkey having benefitted from the falling oil price and seemingly shaken off its 'fragile five' tag, what do these events mean for investors in the country? Citywire Selector asked specialists in the country for their opinion on what investors should do next.
The last coup
Erdinç Benli, who is head of emerging market equities at GAM, said investors will have to watch how the government deals with the people responsible for the attempted coup. Shortly before the events he had moved to a neutral position but has now cut his allocation to an underweight in Turkey.
I think this one of the last coups that we will see because the population was against the coup. They didn’t want another military coup to happen and this is probably a sign that there will not be another one in the future. It shows that people do not want another military regime.
Risk premia will go up. It was moving up and down recently, now the question is will the risk premium stay at the elevated level and not come back? They will probably demand higher risk premia than in the past and to change that we probably have to wait to see what the response of the government will be. If they respect the rule of law then it is a good sign, but for that you have to wait see.
There are always opportunities longer term, but short term, the move is probably out rather than in, because those people who want to invest will probably wait and see what is going to happen. The longer term picture depends on what the government is going to do.
It is very important, what signals they are going to give to investors. We have to wait for how they will react to all the people being retained and the military and how the prosecutors are going to be handle them in front of the law.
Risk premia will rise
Pioneer Investments' emerging market bond team, which is headed up by Citywire + rated Yerlan Syzdykov, does not think Turkey will lose its investment grade rating despite the event. The team said in a statement:
We have defensive to neutral position in Turkey across the funds. We still prefer to keep US dollar-denominated corporates, such as blue chips and conglomerates, especially in the short part of the curve. On Turkey, we are underweight but if there is further sell-off, we are keen on cutting the underweight positions partially. In local bonds, we also have duration short positions.
We do not think Turkey will lose its investment grade rating because of the failed coup attempt and we don’t expect a major change on the macro economy management. The Central Bank of the Republic of Turkey (CBRT) provided liquidity to the banks as much as needed.
There might be a 50bps cut at the CBRT meeting tomorrow. The coup attempt could have some short-term impact on economy, which will be temporary. Having said that the risk premium will be higher since Friday and this will change in the medium term.
Echoes of Brazil
Citywire Selector columnist and EM insider Raphael Kassin, whose consultancy firm Mirage Capital advises on emerging market investment, is surprised that a military force as advanced as Turkey’s planned the coup so poorly. He thinks Ergdogan will use the attempted coup to his advantage.
As events unfolded and the alleged coupsters gave up, it became obvious that the so-called coup had to have been staged to fit personal agenda: to justify stronger presidential powers within the country (hid behind a call for ‘democracy’) and to be used as pressure on the US government to extradite Fetullah Gulen (Erdogan’s philosophical opponent), who is now accused by the president of being the coup-plotter.
As an investor, I see Turkey as following the same steps that Brazil did under the rule of Lula and I fear for the problems this may bring us all. Lula’s Brazil became rife with corruption, an attempt at one-man/party-above-the law-rule. The country is now in financial distress as a result of the Worker’s Party siphoning of funds.
With, and notwithstanding, Turkey being in a different geopolitical spot, Erdogan is leading it along a path similar to that led by Lula. While reportedly strong economic performance and a middle-of-the road political management seemed believable until the coup, I must now ‘distrust and choose to verify even more’ when it comes to investing in Turkey. I must thank Erdogan for raising that awareness with his ‘planned coup’ and hope funds’ risk managers are as lucky.
Government fully in control
Kaan Nazli is an economist in the emerging market debt team at Neuberger Berman. He thinks the government will be able to support the economy.
We see immediate political risks as moderate. The government is fully in control of the situation and is supported across the political spectrum. The economy will suffer through a potential decline in foreign investment flows and tourism though should be supported by accommodative monetary and fiscal policies.
In the medium term, we would watch what a strengthened presidency means for democracy and EU relations, especially the government's ability to seek consensus with the opposition.