As of the close of trading on October 14, the sixth day of Turkey’s military operation against Kurds in northeastern Syria, Turkish President Recep Tayyip Erdogan’s plans were working out pretty well. The risks of tripping up militarily or economically remain huge, but no threats have been realised as yet.
Given the fragility of the Turkish economy since last summer’s balance of payments crisis, the economy is Erdogan’s Achilles’ heel. But the government has so far more or less managed to keep a grip on things since the incursion across the border began.
The USD/TRY rate rose on October 14 to above 5.90 compared to the 5.60s seen at the beginning of the month and the 5.70s recorded before “Operation Peace Spring” was launched on October 8. A morning tweet from Donald Trump on October 13—the showman president told his audience “Big sanctions on Turkey coming!”—pushed the rate into the 5.93s from below 5.91.
The op-ed writers have been out in force, writing impassioned pieces condemning Turkey and calling for precipitate action against Ankara from the West—as if in this era of the pitifully short attention span and media outlets merely preaching to their own converted these writers truly believe they are substantially moving public opinion. It’s far better to soberly take stock of the cold reality we’re dealing with here—Erdogan perhaps has space up to 6.50-7.00 in the dollar-to-lira rate, provided he can avoid sharp daily moves, before the meaningful crap starts hitting the fan.
“Hearing estimates of USD5-7bn sold [by the Turkish state banks] last week… and talk is of USD2bn in state bank FX selling today alone... guess, given high level of dollarisation, there are plenty of FX deposits to go thru...?” Timothy Ash of BlueBay Asset Management wrote on October 14 in a running commentary sent in notes to investors.
Ash also referred to “sanctions noise from Trump” that “just seems like publicity stunt” and observed that “The Trump WH seems loathe to sanctions its friends in the Erdogan administration.”
“Simply steer clear”
“The banks are off 3-5% and the currency another 55bp despite the best efforts of the state bank to defend the lira. I have no idea how this ends,” Julian Rimmer of Investec said on October 14 in his note to investors, adding: “The only stocks that can be touched in Turkey are currency hedges SODA [down 1.71% d/d as of 15h local time on October 14 following Trump tweet on sanctions] and KOZAL [down 0.76% d/d, the smallest loss across BIST-30 components] but these are more options for domestic investors who have to be involved. Intls will simply steer clear.
“I can't even speak to Turkish brokers or journalists about this because they are all unable to speak freely on the issue. It's actually incriminating even to ask them in a private chat, What the fcuk is that witless bully even doing in Syria. I've never met a Turk who cited Turkish terrorism to me as one of their primary concerns. The govt has initiated 78 investigations into people who have been openly critical of Operation Kill All The Kurds since Wednesday.”
Given the emergency rule introduced in the country, Erdogan is currently able to use all the gross reserves. He could even order banks to transfer more USD to the central bank via the central bank’s swap markets or by hiking reserve requirements.
The inflows through the “net errors and omissions” item on the balance of payments are impossible to estimate before they happen and are reported by the central bank—with a two-month time lag.
A USD10bn inflow suggested by Erdogan’s son-in-law and finance minister Berat Albayrak has not even been detected in the balance of payments records yet, months after he informed reporters of it in a closed door meeting.
Who the hell can know?
On the Borsa Istanbul, the benchmark BIST-100 fell on October 14 into the 94,000s, following Trump’s morning tweets on sanctions against Turkey. It ended the day at 93,981, 5.10% down, but is Trump really serious about directing meaningful sanctions at his apparent pal Erdogan? Quite frankly, who the hell can know with this president—and that’s the way he likes it—but suffice to say the key Istanbul stock market index is down from the 105,000s seen at the beginning of October. Those levels were seen following a mysterious and sudden $150mn or so of inflows recorded on the afternoon of September 27, which fixed all Q3 balance sheets that were closed on September 30.
The Borsa Istanbul actually has no impact on the real economy and Erdogan has nothing to gain but prestige by holding the trenches here. The strategy playing on this scenario sees him making up the bank balance sheets at the end of the quarterly reporting periods.
The yield on 2-year benchmark government bonds rose on October 14 to over 15% from the 13%s seen at the beginning of the bond issuance, but the 10-year benchmark yield remained just below 15%.
Erdogan has also so far avoided problems on the domestic borrowing market despite concerns he synthetically imposed lower rates last November, which spooked foreign investors. The strongman orders local banks and domestic funds to buy up government bonds as much as he wishes and at the price he demands.
Turkey’s 5-year credit default swaps (CDS) were back to below the 400-level on October 14 after seeing the 410s last week, while eurobonds were week on week down by up to 5% or slightly more across the curve but that’s not Erdogan’s problem, that problem goes to the eurobond holders.
On the geopolitical front, in the final analysis it is quite clear that Erdogan’s Syria operation is being conducted in coordination with his American and Russian patrons, Trump and Vladimir Putin.
Trump tweeted to allow the Kurds the US betrayed and abandoned to do whatever they would like to do to get themselves out of a hole and the Kurds then announced a deal with Damascus.
Noise in the media suggested that Erdogan will now clash with the forces of Syrian President Bashar al-Assad that have moved north, but the Turkish leader said on October 14 that the situation was under the control of Russia.
It currently seem likely, if everything plays out well for Erdogan and his two ‘uncles’, that Erdogan, badly wounded in city elections this year, will be content with the reassertion of his authority in Turkey that the incursion gives him, Trump will stop sending out his morning briefings on Syria and Putin-sponsored Assad will take supervisory control of Kurdish-held areas from the US.
As part of their public relations activities, Trump and his secretaries, such as Secretary of the Treasury Steve Mnuchin, and senators, notably Republican Lindsey Graham and his Democrat besties, have in Congress been talking tough when it comes to lobbing sanctions at Turkey.
But such sanctions have supposedly been on the way since 2016 when Turkish gold smuggler Reza Zarrab was arrested in the US and charged with breaching sanctions on Iran.
Proved a help not a hindrance
Even if Trump goes ahead and imposes some ‘noisy’ sanctions on Ankara, let’s not forget that his sanctions policy directed at Russia has actually helped the Russian economy to strengthen.
In response to Trump’s latest tweeting on sanctions, BlueBay’s Ash said in a note to investors: “Threatening sanctions on Turkey, Russia, Syria, and blaming the Kurds for stabbing the US in the back by allying with Assad and allowing ISIS [Islamic State] fighters to flee. Meanwhile, the remaining US troops in Syria appear to be at risk of encirclement—shades of Benghazi here. US foreign policy is in total disarray at this point.”
Any analysis that does not filter out the propaganda plays gets a dunce cap.
Erdogan, it would appear, enjoys playing in the sanctions playground to a public relations chorus from an apparently “gravely concerned” Western establishment, but in reality an establishment that is in the hands of elected leaders who have no real moral outrage at the Turkish president and are quite content to let him roll out his hellish schemes in his own backyard. He is, don’t you see, a liquidator of the putrid global order, and don’t those populist voters just love giving the rotten mainstream politicians and media bloody nose after bloody nose. Yes, Erdogan’s your man.
See how he told reporters on October 13 how he yelled at German Chancellor Angela Merkel on the phone due to the impertinent noise her country was making over Syria.
And now on October 14, he’s told reporters that fellow populist British PM Boris Johnson asked him on the phone how he could help out after he explained to him the realities of the operation.
The EU and a series of European member state countries have also conducted some public relations activities centred on the sanctions question and arms embargoes since last week. Those who are angry at Erdogan have been given ample opportunity to grow even angrier, but there is hardly a foreign investor left in Turkey that could create some trouble for “The Conqueror of Syrian Kurdistan”. Fume all you like. This guy will only get the message if you hit him where it hurts.