Turkey: Security Threats and Policy Uncertainty Call for Bearish Outlook - TDS
Cristian Maggio, Head of Emerging Markets Strategy at TD Securities, notes that the Turkey suffered a sixth deadly attack on 19 March, the second in Istanbul this year.
“The state of security and rule of law are rapidly deteriorating, but these concerns have not yet found their way into asset pricing.
• We are inclined to believe that the technical complexity of measuring the effects of terrorism, and the low interest rate environment continue to provide support for rates and high yielding currencies such as the lira.
• In this context, it looks very likely that an adjustment towards fair value would require a catalyst. On the domestic front, we think this could be a policy misstep such as the easing of monetary conditions in Turkey.
• Rate cuts, however, are unlikely to materialize at the next MPC meeting on Thursday, but have more chances to happen after the appointment of the new CBRT Governor. Basci’s term will expire on 19 April.
• We think the new CBRT Governor will not be impervious to political interference, and will lead the CBRT to ease rates by 50bp in April-May, to then hike 300bp in H2 2016 on negative lira pressure.
• In H2, the services balance is set to deteriorate on a possible 15-50% contraction in tourist moneys, causing the C/A deficit to re-widen. We think the recently signed EU-Turkey deal will do little to change this.”
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