https://blogs.barrons.com/emergingmarketsdaily/2016/08/04/turkey-whats-next-in-post-coup-emergency/
UPDATED: Turkey: What's Next In Post-Coup Emergency?
Updated Aug. 5, 2016 8:50 am ET / Original Aug. 4, 2016 3:05 pm ET
Schroders is pessimistic about the economic outlook for Turkey, which remains in a state of emergency after the failed July coup attempt.
In the latest turn of events Thursday, Turkey again asked the U.S. to arrest and extradite Fethullah Gulen, according to the state-controlled Anadolu Agency. Turkey accuses Gulen, an imam living in Pennsylvania, of orchestrating the coup. Gulen has condemned threats to Turkey's democracy and denied the charges. UPDATE: U.S. officials responded that they don't expect to extradite Gulen based on evidence provided by Turkey, The Wall Street Journal reported.
A rally in Karachi, Pakistan in support of Turkish President Recep Tayyip Erdogan.
The iShares MSCI Turkey exchange-traded fund (TUR) is down more than 5% over the past four weeks. While it erased more than 10 percentage points of gains year to date, the ETF is up 3.5% this year; some banks have turned in much better returns including Akbank (AKBTY) shares, up 12%. Airport operator TAV Havalimanlari Holding (TAVHY) showed up on a UBS screen of attractive EM dividend payers earlier this week. But overall, the Turkey ETF has woefully underperformed the iShares MSCI Emerging Markets ETF (EEM) is up 12.5% this year.
Asset manager Schroders' emerging market Economist Craig Botham writes in "Tinderbox Turkey: What Next? that it's hard to see the bright side:
"Should President Recep Tayyip Erdogan achieve his goal of an executive presidency, erosion of institutional quality will accelerate and investment would likely weaken, reducing both short-term and trend growth. A pro-growth, inflationary bias is likely to take hold in both monetary and fiscal policy, which could provide a short-term boost at the cost of long-term pain, exacerbated by lira weakness as policy credibility falls and dollarization rises. ... managing both the conflict in Syria and the refugee problem for Europe will be much harder with Turkey distracted, if not hostile ..."
Botham touches on the outlook for inflation and the Turkish lira, and adds:
"Another worry for Turkey is the external liabilities position. Turkey has one of the largest external financing requirements as a share of GDP in emerging markets, having actually risen since the 2013 Taper Tantrum to more than 19% of GDP. The current account deficit, though reduced, is still high at 4.1% of GDP, with much of the improvement in the trade balance since 2014 driven by lower oil prices rather than fundamental shifts in the Turkish economy."
Meanwhile The Wall Street Journal laid out in a recent story how "Turkey's Powerful Spy Network Failed to See Coup Coming." Turkish intelligence sources revealed tenuous evidence that ties exiled Turkish imam Fethullah Gulen, who is based in Pennsylvania, to Turkey's failed military coup attempt. Gulen has denied ties to the coup attempt:
Gulen's followers "in 2014 started using ByLock, an encrypted messaging app, according to senior Turkish intelligence officials. ... The Turkish spy agency shared the decrypted files with other government ministries ... Days later, on March 21, Turkish analysts saw a YouTube video that showed Mr. Gulen wearing for the first time a khaki robe the same green hue used by the army. Analysts at MIT believed he was signaling his followers in the army, but they had no idea what. A person close to the Gulen group said such speculation was unfounded."
The New York Times wrote an editorial positing that there's renewed anti-Americanism in Turkey after recent events. If true and sustained, that could undermine U.S. investor sentiment. See our recent posts on Turkey and the coup attempt from an investor perspective including "Turkey Market Analysts & Media Silenced In Post-Coup Purge."