Markets have started pricing in Turkey’s political risks

Uncertainties about global liquidity and the economic fluctuations are continuing. But although the current global climate is in favor of emerging markets like Turkey, we cannot benefit because of our ongoing political problems.

Expectations that the U.S. Federal Reserve will delay further interest rate hikes, the probability that Europe will continue its monetary expansion, the continuation of the Japanese expansion, and China’s efforts to revive its economy, have all created a mood that global liquidity will not shrink.

Still, because the general direction remains unclear there is an unstable trend in the global risk appetite, in accordance with the data.

Nevertheless, low commodities prices - including oil - are hitting commodities exporting countries like Brazil and Russia, while commodities importing countries like Turkey are relatively attractive. Added to the delay in the shrinking of global liquidity, this factor is leading to a continuation of capital flows to commodities importing emerging markets.

As a result, there has been a positive trend in Turkey’s economy over the last couple of months. The fact that a single-party government was able to be formed after the Nov. 1 election, political stability has also been influential. Markets have not significantly reacted against the spreading of regional conflict, the possibility of Turkey’s involvement in a hot conflict, or the domestic environment of fighting.

This was all true at least until week. We can now say the political risks have started to be priced in following Turkey’s bombing of YPG forces in Syria.

While the currencies of most emerging markets gained value at the beginning of this week, the Turkish Lira saw a serious loss of value. The real risk seen by the markets was the disapproval of the U.S. and the West of Turkey’s moves. 

In short, markets started to consider the danger that Turkey’s alliance with the West, which has always continued despite many tense times, is at threat. Local and foreign capital started to fear of the consequences of Turkey losing the support of the West, on top of the isolation that the country is currently in.

Western support

Put another way, the fact that a new political situation, which started with Turkey’s downing of the Russian jet last November, has only deteriorated in the months since, giving negative economic results.

According to some analyses, the YPG - which seems to be acting together with both the United States and Russia - will have to make a choice within a month. That choice will be of close interest to Turkey.

Whether the United States will side with Turkey or not will be carefully watched not only for its political but also its economic consequences.

It is also important to add that other real problems are the fact that the hot conflict in the Kurdish issue and the internal competition within the Justice and Development Party (AKP) are also now being perceived as political risks.