The Fed's Shadow Looms over Turkey's Strongman
Polls showing Erdogan’s vulnerability are a bearish signal. But a stronger dollar is the real nightmare.
The bad times are back again for the Turkish lira -- the glow from the more-aggressive-than expected 125 basis points rate hike by the central bank on June 7 has definitely worn off. The currency has resumed its slide and is at the highest level to the dollar this month. The benchmark 10-year bond has jumped to 15.75 percent.
Fears on how hawkish the U.S. Federal Reserve will be at its monetary policy meeting Wednesday are causing wobbles throughout emerging market currencies -- and particular those more reliant on dollar financing, such as Turkey. The weak ones always get picked on more, and Turkey is in a particularly vulnerable spot given the size of its current account deficit.
It doesn't help that a poll commissioned by Bloomberg showed that the presidential and parliamentary elections on June 24 are not a simple walk in the park for President Recep Tayyip Erdogan and his ruling AK party. Elections were not due until November 2019, but Erdogan brought them forward in part to take advantage of the appearance of disarray in the opposition. His rivals have made a surprising turnaround, which makes the expected results harder to call.
It remains almost certain Erdogan will secure another presidential term, with vastly increased powers. The continuation candidate isn’t a clear win for investors. As I’ve argued, the central bank’s newfound independence could disappear the second the election is over.
However, the poll raises the prospect that he may not win with a clear majority on the first round. That would mean he would face a runoff in a second round on July 8. This he would surely take in a landslide. But his party may not achieve a parliamentary majority, and having a strong opposition adds uncertainty and makes the investment environment less stable. For markets, it’s a choice between the terrible and an awful mess.
The central bank has raised rates by a total of 500 basis points since late April, to 17.75 percent. As the election approaches yet another rate hike looks highly unlikely – that the dollar is stronger is a poor justification, and anyway Erdogan would hardly be likely to allow it.
The poll heightens the justified bearishness around Turkish markets. But the real problem is the Fed. The potential for the dollar to strengthen is a strain for all emerging markets, but Turkey has more fleas than most. That is a burden that will outlast the nation’s current electoral machinations, and the currency and bond markets are right to reflect that.
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