Turkey’s Purged Portfolio Appetite

Turkish stocks recovered from the post-coup try slide, with domestic-demand driven 3 percent GDP growth intact, despite a massive roundup of tens of thousands alleged plotters and sympathizers, which forced crowded jails to release other prisoners early. President Erdogan also turned on the EU for demanding changes in anti-terrorism law, and the US for refusing to extradite the Gulen movement leader without proof of his involvement in the army rebellion. He met with Russian President Putin in an effort to patch their rift over a Syrian border jet downing and spur renewed tourism flows, as Moscow began bombing operations targeting Assad opponents through an Iran base. His economic team scrambled to reassure the two international ratings agencies maintaining investment-grade that fiscal-monetary policy and structural reform direction would continue, while the capital markets regulators pulled licenses of individual analysts who issued negative reports in the event aftermath. The media and judiciary experienced widespread firings under criticism from political parties outside the ruling AKP despite the united anti-putsch stance. The President hinted at another infrastructure stimulus to keep unemployment below 10 percent, following a minimum wage hike months go which helped to steady consumer confidence though the brief clash. Despite an immediate lira selloff, hard currency banking system deposits barely increased in its wake, and dedicated foreign investors took that as a signal to restore positions. The budget is roughly in balance with spending room, and the central bank took steps toward interest rate simplification and liquidity injection and may formally ease again soon. With his victory the President may push harder for constitutional revisions enshrining executive power, and for more generous terms on a refugee aid deal struck with Brussels which has unraveled after the first EUR 3 billion installment. He is expected to lambaste Western allies for their crisis response at the September special UN General Assembly gathering on the issue, which will include private sector participants proposing new funding initiatives.

Russian shares were up almost 20 percent on the MSCI Index through July in advance of the Erdogan visit to Saint Petersburg marking return of their “friendship axis.” Recession has bottomed with the benchmark rate on hold ahead of local elections, with President Putin conducting his own purge of corruption-tainted friends in the inner circle to solidify party support. He reassigned his long-serving chief of staff after dismissing the head of the state railway, both confidantes for decades. External saber-rattling maybe another near-term popularity strategy, with defense mobilization summoned for Crimea after reported incursions. EU sanctions were recently renewed for the seizure, but Brexit renegotiation may complicate a united foreign policy front into year-end when the subject reappears on the agenda. Ukrainian bonds have outpaced the EMBI index with a 15 percent return, despite IMF program impasse and the implication of the Trump presidential campaign chair in the US in over $10 million in off-the-books payments under the previous ousted government. Reserves are back to three months imports, and the currency has firmed with occasional official intervention. The central bank has shuttered 80 institutions in a sector cleanup, but has been stymied in moves against oligarch-controlled Privatbank with one-third of retail deposits despite wholesale bad practice to be banished.