Turkey’s Whirling Word War Backfires
After a Europe worst MSCI index 40% loss last year, Turkey stocks looking for a bottom bounce were caught in another round of economic and diplomatic communications tiffs replaying recent US-Ankara lira crash finger pointing. President Erdogan, with his son-in-law in charge of fiscal and monetary adjustments under no recourse to the IMF, again pressed the central bank to cut benchmark rates to fight 25% inflation, after technical recession with two consecutive quarters of contraction. Last year GDP growth came in around 1.5%, and ratings agencies predict negative 2019 numbers as construction in particular sustains a 5% dip. Hundreds of companies filed for initial protection under a new bankruptcy code setting off a supplier chain reaction, as bank bad loans could double to 6% of the total. Big retail and manufacturing names acknowledge distress, and financial shares were hammered after Akbank rushed out a rights issue for additional capital. To inject confidence and meet borrowing needs, sovereign debt issues were placed in November and in the first weeks of 2019, the former in the wake of global focus on a rare Kazakhstan offering. The lira strengthened toward 5.5/dollar in the aftermath of these operations, and a period of calm with Washington after an evangelical priest was freed from arrest after alleged support for the failed military coup. The government continued to insist on the extradition of opposition cleric Gulen in US exile, and has begun to demand the same for a professional basketball star urging protest almost picked up on travel in Asia. As a NATO ally the Trump administration approved a $3.5 billion missile sale after Ankara threatened to buy equipment from Russia, and it also got a waiver for continued oil imports from Iran following renewed bilateral sanctions. On Syria the two presidents after a phone conversation reached preliminary understanding on withdrawal of American troops battling ISIS and the Assad regime with Kurdish forces, but it degenerated into mutual accusations with Turkish tanks reportedly massing on the border as President Trump vowed economic reprisal for any anti-Kurd action. The move triggered another refugee wave, with 3 million Syrians already in the country with limited education and job access as official unemployment goes deeper into double digits.
Russia’s President Putin and his team have attempted to shift the narrative to repatriation and reconstruction, and a small contingent of returnees from Lebanon was prominent before harsh winter conditions set in to match working ones with formal refugee hiring prohibited. Debt default there is on the emergency agenda, as banks and expatriates reach their comfort limit with sovereign risk without functioning public services on 1% growth. Russian shares were barely down in 2018 at single-digit P/E ratios, and commodity recovery despite bank and energy company Western sanctions. Inflation is above the 4% target, and after a 15% ruble fall against the dollar, the central bank nudged the benchmark rate, as foreign debt investors prepare for future curbs despite US Treasury Department hesitation on global market fallout. Russia moved to eliminate dollar reserve exposure and embrace the Yuan along with the euro as a counter-measure, as Morgan Stanley pulled out of Moscow and relocated securities operations to London to face Brexit’s cross-border standoff.
