Foreign fund managers respond: What can we foresee in the Turkish economy after the election?

Arti Gercek reports that the English news agency Reuters asked foreign fund managers for their predictions following the elections, which are set to occur under the shadow of Turkey’s economic crisis. The agency stated, “International investors, many of whom have bailed out in the last five years amid recurring market turmoil and Ankara's embrace of unorthodox economic policies, are watching closely.”

The Reuters article commented that the election “marks a fork in the road” for the Turkish economy and might perhaps be “the most consequential in the century-long history of the republic.”

Fund managers speaking to the agency said that “even the hint of an opposition win could prompt a significant rally in Turkish assets given promises to roll back 'Erdonomics.’ That being said, the article also mentioned that Erdogan’s “drastic transformation of the economy and financial markets means such a change would bring its own uncertainties.”

“INTEREST RATES WILL NEED TO BE SET AT A MUCH HIGHER RATE”

The head of EM sovereign research at the Los Angeles based asset manager TCW, Blaise Antin said that “an immediate ‘quick kill on FX appreciation seems unlikely to materialize’ even if Erdogan loses.” Antin also said that even if the opposition wins the election, matters such as the overvalue of the Turkish Lira in addition to the need to set interest rates to a “much higher level” will need to be addressed. As such, the American economist noted that, “only in the medium-term could markets turn sustainably bullish.”

The article also stated that a scenario where Erdogan retains the presidency while the AKP loses its parliamentary majority after the Turkish election is possible. Commenting on this hypothetical, Antin said that this could be “the worst case outcome” as it would lead to policy uncertainty and market volatility in the short-term.

“IF ERDOGAN LOSES, THE BURDEN ON THE TREASURY WILL BECOME SOMEONE ELSE’S PROBLEM”

Reuters, which commented that “Erdogan has never looked more vulnerable, with the economy his Achilles heel,” wrote that a lot of social aid spending was made before the elections, such as the significant increase in the minimum wage, the regulations in the retirement age, and incentives in energy bills. Galip Dalay, associate fellow at the Chatham House in London, said, "‘Erdogan is offering one (support) package after another,’ which will put ‘significant pressure’ on the public purse … ‘But if he loses the election that will be someone else's problem.’"

Credit institution Fitch’s Paul Gamble said that “the policies just don’t look sustainable.”

The article stated that the government's “depreciation-protected bank deposit scheme” seemed to have worked in the short term, that money was coming in from Qatar and Russia as well as tourism revenues, and that Erdogan’s share of votes has started to rise again since August when the depreciation in the lira slowed down. Speaking to Reuters, a banker said that because of the increase in the foreign exchange reserves at the Central Bank of Turkey, some foreign investors had started to make short-term entries into the Turkish market.

“THE LIRA IS STILL 15% OVERVALUED”

Robin Brooks, chief economist at the Washington-based Institute of International Finance, said that the lira is currently held 15 percent higher than its normal value, and that “the credit stimulus keeps growth higher than Turkey can really sustain.”

Sergey Goncharov, a fund manager at the Zurich-based company Vontobel, commented that the predictions that "Erdogan's policies would lead to disaster" did not come true, and said that “Turkey had no problem borrowing $2.75 billion from international capital markets” last week.

“That complicates the choice for voters who could face a painful initial economic downturn if an opposition victory were to bring a return to free market policies,” commented Reuters. Regarding current economic policies, Goncharov said, “It is an unstable equilibrium, but it is a hard one to move out of.” (EXTERNAL NEWS)