TRY and Turkish Equity Bounce to be Short Lived
TUESDAY
NOVEMBER 03, 2015
Per Hammarlund, SEB Chief EM Strategist, [email protected], +46-(0)8-5062 1377
Markets greeted the AK Party’s victory in Sunday’s
parliamentary election by lifting Turkish equities by more
than 5% and the TRY by 3.3% to 2.82 against the USD.
The 10-year yield also dropped by 36bps to 9.2%, the
lowest since July. However, similarly to the gloom that
followed the inconclusive June 7 election, we believe
that the euphoria will be short lived. With speculation
about a US Fed rate hike and pressure on the CBRT to
loosen monetary policy likely to resume, USD/TRY will
move back up to resistance at 2.9427 in 1–2 weeks.
MARKETS TO GIVE UP GAINS
Yesterday’s gains in equities, bonds and the TRY provide a
near-mirror image of the losses following the June 7 elections,
which produced a hung parliament. The simple majority
achieved by the AKP is something of a goldilocks scenario.
The party now has a clear mandate to rule with 317 of 550
seats in parliament, but insufficient seats to change the
constitution without support from the opposition. (President
Recep Tayyip Erdogan wants to introduce an executive
presidential system, but would need 330 seats to bring the
issue to a referendum, or 367 seats to do it with a vote in
parliament.) However, the election changes very little in terms
of economic vulnerability. Thus, the impact of politics will
taper off in the coming days and weeks. It took 10–14 days for
markets to recover the losses following the June 7 election as
investors’ attention shifted away from politics, trading instead
on a stabilisation of global sentiment in June and July. This
time around, we expect falling global risk appetite to reassert
its influence on the TRY in the similar time frame.
The root cause of Turkey’s economic weakness is the low
savings rate, which generates an unwieldy current account
deficit. With a relatively weak business environment and
cumbersome labour market regulations, FDI is too small to
Important: Your attention is drawn to the statement on the back of this report which affects your rights
cover the current account deficit (projected to reach 4.5% of
GDP in 2015). As a result, Turkey relies on external financing
in the form of short-term portfolio capital flows to finance
investment and a high level of domestic consumption, leaving
the TRY sensitive to speculations about a US Fed rate hike and
changes in investor sentiment.
Sentiment will be driven by economic management. The CBRT
narrowly escaped the need to hike rates in August and
September, due to an improvement in global risk appetite
following a surprisingly dovish Fed and soft US labour market
data. However, political wrangling over the CBRT’s monetary
policy will resume and hurt the TRY. In addition, structural
reform to lift inadequate national savings by freeing up the
labour market and hiking interest rates will be absent. The
consequent build-up of external liabilities and drawdown of
net international reserves will keep the TRY in the group of
most vulnerable EM currencies and send the TRY tumbling on
global risk aversion.
STABLE GOVERNMENT TO 2019
The AKP will form a single-party government led by Prime
Minister Ahmet Davutoglu. President Recep Tayyip Erdogan
will act as a de facto executive president, which will eventually
lead to a power struggle with PM Davutoglu. Erdogan took
more of a back seat role in the latest election campaign, which
seems to have boosted support for the AKP. As a result, PM
Davutoglu will feel emboldened to challenge Erdogan, but a
split of the party is not in our main scenario. The key point is
that Erdogan will continue to push for a formal executive
presidency. However, the issue is controversial within the AKP
and he will likely only make partial progress. Such a balance of
power would be the most market-friendly scenario, but if it
breaks down, further political polarisation and uncertainty will
be just around the corner.
Emerging Markets Strategy Focus
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