Turkey: More politically stable country after the failed military coup - Rabobank

Piotr Matys, EM FX Strategist at Rabobank, suggests that last week ended in rather dramatic circumstances with newswires reporting late in the evening on Friday that a relatively small group of the Turkish army made an attempt to topple President Erdogan and his governing Justice and Development party (AKP).

Key Quotes 

“President Erdogan, who at that time was still on holiday in Marmaris, used FaceTime to call CNN Turk to urge his supporters to prevent the coup. Turks responded to Erdogan’s call by taking to the streets to stop rolling tanks and military vehicles and to disarm soldiers. It was a heroic effort not only in the name of a democratically elected president and the government, but for democratic standards in general. While democracy prevailed and the situation has stabilized over the weekend, clashes in Ankara and Istanbul left more than 200 people dead.

We expect Turkish assets to be vulnerable in the short-term. The worst case scenario has been avoided as a successful coup would have triggered a full-scale sell-off. The damage, however, has been done. Turkish bonds and stocks face a turbulent period due to heightened political risk. We expect the lira to remain volatile in the coming days and to underperform its CEEMEA peers.

Over the mid-term and the long-term horizon, if the rule of law and checks and balances are seriously undermined in the coming months, this could lead to capital outflows with USD/TRY ending this year at a new all-time high. These shocking events have seriously challenged our fairly constructive view adopted at the end of 2015 that USD/TRY should spend this year below the psychological level of 3.00 level. It is too early, however, to abandon it as previous episodes of political woes had a relatively short-term impact on Turkish assets. Paradoxically, Turkey may be a more politically stable country after the coup. With bond yields in developed economies falling to record lows, significantly higher yields offered by Turkish bonds could still prove irresistible for foreign investors.

The impact on global markets should be limited as the coup failed and the ruling AKP reassured that it regained control with 6,000 people already arrested over the weekend.”