Turkish markets were nervously watching for further developments late on January 14 following Donald Trump’s tweeted threat to “devastate Turkey economically” if it attacks US-allied Kurdish fighters in Syria.
Analysts questioned whether the US would really want to pull the economic trigger on Turkey.
Timothy Ash, an emerging markets strategist at BlueBay Asset Management, tentatively concluded that Trump and Turkish counterpart Recep Tayyip Erdogan were still likely to do a deal on how to address the planned US pullout from Syria, announced abruptly by the US president in mid-December even to the surprise of his own national security and defence establishment.
Ash said he could not see the US going ahead with an attempt to economically devastate Turkey, saying in a note to investors: “If they are seen to be responsible for ‘collapsing’ Turkish markets and the economy, they can say goodbye to any alliance and strategic relationship with Turkey. Game over there—and [Russian President Vladimir] Putin will be welcoming Erdogan with open arms. Maybe that's what Trump and Putin want.
“It would also hurt a large weight of the US institutional investor community—who are invested in Turkish debt/equity. Notable therein that the UST[reasury] has been very mindful of not hurting US investors when it has rolled out sanctions on Russia, a competitor and not an ally like Turkey.”
Ash added that “one assumes that Trump does not really know what he is talking about” or that his tweet was “just part of his usual bluff/art of the deal to get the Turks to the table” around US Secretary of State Mike Pompeo’s plan for a 20-km buffer zone in northern Syria, which, said Ash, “actually the Turks proposed before”.
Threats undermine lira recovery
Trump’s threat to Turkey placed the Turkish lira (TRY) under renewed pressure. The currency, in the midst of a recovery from last summer’s lira crisis, weakened by as much as 1.6% to 5.5450 against the USD, but by around 17:30 local time the losses had been trimmed to a decline of 0.75% on the day and a rate of TRY5.4927. The Turkish central bank has been using an open market operation on the Borsa Istanbul derivatives market to curb lira losses. The regulator managed to keep the USD/TRY rate in the 5.20-5.40 band from mid-November to the end of 2018, but 2019 has seen the lira slide beyond that range.
Turkey is highly reliant on the dollar markets. The country’s economy has a big external financing requirement of around $200bn annually. That’s the case despite a massive improvement in its current account position amid stark economic rebalancing brought about by the currency crisis that sparked a collapse in demand and has put Turkey on course for a recession. Turkey also has low FX reserve cover.
“The US does have the ability to devastate the Turkish economy if it so wished,” noted Ash, adding: “Just cast your minds back to the summer when extremely light US sanctions on Turkey over the [detained US pastor Andrew] Brunson case (two Turkish ministers sanctioned) had a huge and disproportionate impact on the Turkish economy and the lira in particular.”
Trump’s tweeting “is re-alerting the anxieties we saw last year in Turkey’s relations [with the US]... So, I think [it] is highlighting the geopolitical risk for the Turkish lira and we remain quite bearish on the currency”, Jakob Christensen of Danske Bank told Reuters.
“We see that the negative decoupling trend in the lira that we observed last week is strengthening today. Trump’s statements are the main reason for it. The market follows the ties with the U.S. and Syria process closely. Selling pressure might gain strength in case the relations between Ankara and Washington strain again,” an unnamed FX trader of an unnamed bank told the news agency.
Messaging to domestic voters
Out on the streets, Turks think less of the ongoing tensions between the two Nato allies. They tend to see cyclically renewing tensions between the US and Turkey as a consequence of both presidents’ messaging to their domestic voters.
“Non-combative tone of #Erdogan spokesperson @ikalin1’s response to @realDonaldTrump’s tweet regarding Turkey suggests that Washington and Ankara may be close to a deal regarding #Syria, and that #Turkey is trying (and hoping) to preserve it,” Soner Cagaptay of the Washington Institute said on Twitter, adding: “If one thing makes Turks’ blood boil, it would be language equating Kurds and the [Kurdish groups which Ankara regards as terrorist] PKK/YPG. That’s why I find Erdogan spox @ikalin1’s response to Trump’s tweet (“Turkey attacking the Kurds”), which shows frustration but not anger, quite sober. Ankara still wants a Syria deal!”
Whether there is a deal or not, Turks’ “boiling blood” will remain the main item on the agenda for Erdogan in advance of the end-of-March Turkish local elections.
As bne IntelliNews noted on December 12—when Erdogan declared that there would be renewed military operations in the eastern Euphrates region of northern Syria within a few days—a stepping up of Turkish military moves and harsh rhetoric from Erdogan directed at his Western partners are traditional pre-election campaign moves in Turkey. What’s more, they are essentially tolerated by the president’s allies.
Pompeo, currently in Riyadh as part of a Middle East tour and asked about the exact meaning of Trump’s tweets, said on January 14: “We have applied economic sanctions in many places, I assume [Trump] is speaking about those kinds of things. You’ll have to ask him… I don’t think it changes the president’s decision for our 2,000 uniformed personnel to depart Syria… If we can get the space and the security arrangements right it would be a good thing for everyone in the region.”
The day also saw Turkish Foreign Minister Mevlut Cavusoglu stating that Turkey would not be intimidated by the US president’s tweets, saying: “Nothing could be achieved by threatening Ankara economically and strategic partners should not communicate over social media… Trump’s latest tweets on Syria were related to domestic politics.”
By tweeting in the fashion he did, Trump might inadvertently provide the Erdogan administration with so-called evidence for its populist theory sold to voters that Turkey’s current economic turmoil has been caused by foreign attacks on its economy, with the US playing a lead role.
The military tensions not only help Erdogan curtail the attention given to the less than competent domestic economic decision-making that was a big factor in producing the currency crisis and other economic travails, they help him control the opposition.
The main opposition Republican People’s Party (CHP) leader Kemal Kilicdaroglu wakes up early in the morning and pledges his full support whenever Erdogan declares a military operation. Meral Aksener’s Iyi (Good) Party also declares its open support for the military moves.
The People’s Democratic Party (HDP), which plays the leading role in representing Turkey’s Kurdish minority, is accused by the Erdogan administration of being terrorist because it questions the president’s military incursions into Iraq and Syria, which generally coincide with pre-election periods or with periods of rising pressure on the president in domestic politics.
Meeting of Ocalan brothers permitted
While Erdogan was busy fuelling tensions with the Syrian Kurds, he simultaneously allowed Mehmet Ocalan, the younger brother of the long imprisoned Kurdish Workers’ Party (PKK) leader Abdullah Ocalan, to on January 12 visit his older brother for the first time since September 11, 2016.
The previous visit took place a few months after the failed military coup attempt and also while the Turkish army was conducting Operation Euphrates Shield in Syria. Erdogan launched that operation—the Turkish armed force’s first direct intervention in Syria, which produced Turkey’s sole direct battle against Islamic State—on August 26, 2016.
HDP MP Leyla Guven, the only Turkish MP still in jail, has been on hunger strike for 67 days campaigning for the removal of the isolation of PKK leader Ocalan, bianet reported on January 14.
Prior to the last meeting of the Ocalan brothers in 2016, 50 people, including Guven, began a hunger strike. It ended after the meeting took place, according to bianet.
"We will announce details in the following days. Mehmet Ocalan having a meeting does not mean that the isolation is removed. This meeting is important but it should not be limited to this. The period ahead is a tough period," HDP co-chair Pervin Buldan reportedly said on January 13.
Developments tracked ahead of rate-setters’ meeting
Turkish markets, meanwhile, are closely watching developments ahead of the central bank’s monetary policy committee meeting due to be held on January 16.
The market consensus is currently that Erdogan would not like to see a gamble on a rate cut emerging from the meeting. The second MPC meeting of 2019 will take place three and a half weeks before the elections on March 6 and the third one will be held on April 25.
Jason Tuvey of Capital Economics reiterated in a January 14 research note: “Past experience suggests that the macroeconomic conditions are now in place for the Turkish MPC to start reversing last year’s monetary tightening. We expect the one-week repo rate to be cut by 50bp at Wednesday’s meeting. But the central bank’s failure to tackle the country’s inflation problem means that inflation and interest rates are ultimately likely to remain higher than they were in early 2018”.
Capital Economics still sees the Turkish banking industry as the most vulnerable across the emerging markets universe, the economic research company said on January 11 in its regular emerging markets financial risk monitor report, adding: “The recession in Turkey has caused the non-performing loan ratio to increase to its highest level since 2010 and it will probably rise further in the coming months. However, banks are well capitalised and seem to be able to absorb these. The big risk lies in banks’ large external debts—if they struggle to roll these over, it could precipitate severe strains in the sector.”
“Our Risk Monitor warned about the risk of currency crises in Turkey and Argentina early last year. Following a sharp fall in the lira, Turkey’s balance of payments position has improved rapidly, reducing downside risks to the lira from here on,” Capital Economics added.