Turkey: Very negative outlook for assets - BBH

According to analysts from Brown Brother Harriman, the latest events from Turkey did not have large implications over Emerging Markets but they see a very negative outlook for Turkish assets.

Key Quotes:

“After last Friday’s failed coup attempt in Turkey, a measure of calm has returned to global markets.  We did not think Turkish developments have wide-reaching implications for EM assets, but we do remain very negative on Turkish assets in the wake of the coup and ongoing political uncertainty.”

“The economy remains sluggish. GDP growth is forecast by the IMF at 3.8% in 2016 and 3.4% in 2017 vs. 4% in 2015.  GDP rose 4.8% y/y in Q1.  This was slightly stronger than expected, but was boosted by a low basis for comparison.  Base effects for the rest of the year are higher and so less favorable for y/y comparisons.”

“The central bank next meets July 19, and no change in the 7.5% benchmark rate is expected. However, it is expected to cut the overnight lending rate by another 25 bp to 8.75%”

“USD/TRY made a new high for this move Friday around 3.05. This fell just shy of the all-time high near 3.0750 from last September. After today’s relief rally in the lira, we expect the dollar to eventually test the 2016 high near 3.06, followed by new all-time highs.” 

“Our own sovereign ratings model shows Turkey at BB/Ba2/BB.  Both Moody’s and Fitch were a bit premature in upgrading it to investment grade. But even S&P’s more conservative BB+ rating seems at risk.  Deteriorating fiscal and external balances coupled with worsening political risk are likely to be the triggers for a downgrade this year.”