(MENAFN- Khaleej Times) 2016 was an "annus horribilis" for a global investor on the Bosphorus.
The July 15 failed military coup attempt against President Tayyip Erdogan convulsed the AKP's relations with the military, the Turkish "deep state" and led to a purge of 100,000 alleged Gulenist sympathisers, a devastating hit to consumer and business confidence. The plunge in the Turkish lira to 3.5 has devastated the capital ratios of Turkish banks and corporate borrowers, given their $200 billion dollar denominated external debt. Foreign Direct Investment (FDI) has plummeted to only $10 billion, barely enough to cover one third of the highest current account deficits in the emerging markets, making Turkey hostage to the risk appetite of offshore speculative capital - hot money. The breakdown of AKP's peace deal with the Kurdish secessionist insurgents of the PKK has led to a wave of terror bombings in Turkey's major cities.
Turkey is also host to millions of Syrian refugees and vulnerable to Daesh terror attacks that have impacted tourism in Istanbul, Anatolia and the Aegean coast. The assassination of the Russian ambassador to Ankara could lead to a new low in relations with the Kremlin, a disaster for Turkish exports. Russia risk and the rise in crude oil prices means the current account deficit could well widen to six per cent even as the Turkish lira tanks to 3.8. The Turkish economy could well slip into recession in 2017 even as inflation rages.
I believe Turkish equities and lira risk mean the MSCI Turkey country index fund traded in New York, symbol TUR, could well fall 20 per cent in 2017.
As inflation accelerates to nine per cent next year, Turkish bonds could well be the worst performer among major emerging markets, in the same league as Nigeria, Venezuela and Philippines in terms of spread widening. It would not surprise me if Turkey's sovereign credit rating is downgraded by S & P from its current BB. Trump's election will lead to a deterioration in Turkish international financial and political risk. Trump's rapprochement with Russia and refusal to green light regime change in Damascus is contrary to Turkish national interests. Trump's fiscal stimulus can also trigger three Federal Reserve rate hikes in 2017, a macro scenario that would mean a hot money exodus from the Turkish government bond market.
This would further pressure economic growth and activate the consumer debt time bomb in Turkish banking, as the lira's free fall exacerbates inflation, bank funding risk, loan growth and corporate balance sheet risk. King Dollar, $55 Brent, a spike in the ten-year US Treasury bond yield, political risk and banking systemic stresses mean Turkey is the riskiest among Morgan Stanley's "fragile five" emerging markets in 2017.
Turkish corporate and retail investors, hyper-sensitive to the rising risks of the Turkish lira, have scrambled to buy US dollars, creating a vicious cycle that only a significant monetary tightening by the central bank in Ankara can stop before it leads to a full blown currency/baking crisis.
My strategy recommendation to short the Canadian dollar at 1.30 is five big figures in the money as the loonie has tanked to 1.35, despite the Opec deal in Vienna. The recommendation to accumulate Saudi banks on the eve of the kingdom's $17 billion new issue eurobond is also profitable as the Tadawul index rose to 7,000 from its recommended buy level of 5,600. Last week's call to short the Chinese equities index fund (FXI) at 36 was profitable as it has fallen to 33.80 as I write. Bye by Shanghai seems to be another collateral damage victim of King Dollar.
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