My 29 May article highlighted what were then still fairly low-key but growing worries about emerging markets (EMs). One of the five EMs on which I concentrated was Turkey which has now become the focus of significant investor concern including over contagion (already evident) and potential systemic risk.
Earlier this week I was asked for views on a paper (circulated to subscribers only) by expert Turkey commentators Murat Ucer and Atilla Yesilada of Global Source Partners in which the former opined that Turkey’s President Recep Tayyip Erdoğan probably had a plan to see his country through to after the US midterms when he would hope to strike a better deal with President Donald Trump than would be obtainable between now and then; but the latter expressed significant scepticism — and therefore greater concern over prospects.
I find myself leaning quite firmly towards Mr Yesilada’s thinking which is actually that Mr Erdoğan does have a plan (of sorts) but it simply doesn't add up. Consider.
- First and foremost, it is essential to keep in mind that Turkey was already deeply mired in economic problems of Mr Erdoğan’s own making before this latest blow-up with the US and Mr Trump’s decision to double recently imposed tariffs on Turkish steel and aluminium over the case of Pastor Andrew Brunson. There is a certain irony in this in that Mr Erdoğan’s party, the AKP, first won power in 2002 in significant part because of successive previous governments’ failure to manage the economy properly, culminating in an economic crash in February 2001. Furthermore, his subsequent 13 (by my count) election victories owe much to his general management of the economy and the economic benefits he has brought to the AKP’s core supporters in Anatolia in particular. However, his initially largely conventional economic thinking has latterly evolved into a seeming disdain for both the ‘laws’ of economics and international investor expectations — to the point where early this year I was chairing a panel at an EM conference in London on which a senior investor remarked that his fund had pulled out of Turkey altogether and was very unlikely to go back in in the foreseeable future. In other words, as Peter McCoy has recently written in Bloomberg Businessweek, Turkey was ripe for a currency crisis even before Mr Trump waded in. Nevertheless, given investors’ reaction to Mr Trump’s action it is possible that mending fences with Washington would calm sentiment to an extent and at least offer Mr Erdoğan some breathing space.
- Mr Erdoğan almost certainly realises that this is the case even if, as yet, he has shown no willingness whatsoever to compromise. In this regard, Mr Ucer may be correct in suggesting that Mr Erdoğan may have some (quite possibly justified given the importance to Mr Trump of support from the evangelicals in America) thoughts about the relevance of the midterms to Mr Trump's current stance. And he will almost certainly be minded that Mr Trump likes nothing more than making a deal (no matter how superficial, not to say worthless, said deal may turn out to be in the end). But I think his much bigger preoccupation is the March 2019 municipal elections in Turkey itself which are not looking too good for him just now, especially Istanbul which is his former stronghold. By my reckoning, he needs a deal with the US sooner rather than later to have a decent chance of turning sentiment there around. In other words, whatever he may think I don't think he can afford to let this stand-off with the US run until mid-November in terms of domestic electoral considerations.
- I agree that Mr Erdoğan is looking to China, Iran and Russia, as Mr Ucer suggests — plus Qatar. But Beijing has enough problems of its own with Mr Trump and is not, in my view, likely to want to provoke trade-related retaliation, a possibility at least, for helping Turkey beyond the major Belt & Road-related investments it is making already. Iran probably doesn't have the resources. And any deal with Russia in 'kind' (eg paying for oil and gas in lira) would likely not stop the market run. As for Qatar, yesterday’s announcement by Ankara of a USD15bn commitment in foreign direct investment (FDI) by Doha may sound impressive at first blush; but FDI tends to be slow coming through the pipeline and Turkey’s needs are immediate. Furthermore, I am sure Doha, for all its allegiance with Ankara, really does not want to give Mr Trump further excuses to side with Riyadh in their protracted regional feud.
- As for the EU, I don't find the suggestion that it may come to the rescue totally implausible — not least because of perceived threat of Turkey allowing tens of thousands of Syrian refugees to cross into Europe. But, Turkey in general and Mr Erdoğan in particular are not exactly flavour of the month with either of the 'big two', ie Berlin and Paris, and there are plenty of smaller countries among the 27, eg the Netherlands, which would be at least as inclined to take a tough line if aiding Turkey were proposed. (And the fact that Europe is largely on vacation through August is hardly helpful either given the immediacy of Turkey’s situation!)
So, where does this leave us?
Relative to whatever Mr Erdoğan may be thinking, I have in mind Field Marshall Helmuth von Moltke's famous 'no plan survives first contact with the enemy'.
First I think it important to keep in mind that, as Mr Erdoğan probably also understands, this is not just about a detained evangelical pastor. The degree of annoyance with Turkey in Washington runs deep and wide — Syrian Kurds, cosying with Russia, breaching sanctions on Iran, US embassy staff in detention etc etc. Squaring all those circles would require a major capitulation.
But Mr Erdoğan does have a remarkable record for volte-face. Mr Trump may not be truly aware of this; but I am sure Secretary of State Michael Pompeo and National Security Advisor John Bolton are — and they seem very minded to play hardball. I am therefore inclined to believe that what really matters is how much they think they can squeeze out of Mr Erdoğan in terms of a whole basket of issues in due course, meanwhile letting the markets — and their boss's penchant for sanctions — increasingly turn the screw.
So, the real question may be to what extent the team around Mr Erdoğan (not an impressive crew these days, including his son-in-law and new finance minister Berat Albayrak who is due to make a conference call with investors today, for which over 3,000 have reportedly signed up, but will not be taking questions!) grasp this and are willing to stick their individual or collective neck out to get it across to him that the least bad time to make a deal — or at least a big gesture — could very well be now! And I'm afraid I simply don't know the answer to that.
This being said, let's keep gently in mind that Eid al-Adha, falling on 22 August this year, marks Abraham's willingness to sacrifice his only son as an act of obedience to God’s command. Could this, I wonder, provide Mr Erdoğan with sufficient cover to send Mr Brunson back to America?
If this were to be the case — and it is a long shot on my part, I must admit — it would almost certainly ease current market concerns. However, it alone would certainly not address Turkey’s fundamental economic challenges; nor would it resolve the general stresses and strains around EMs as dollar liquidity dries up. So, at best, a temporary reprieve. But for Mr Erdoğan one which may help to reduce the possibility of humiliating and potentially highly damaging electoral defeats in March 2019.