Last month, Turkey’s central bank had a chance to give the plunging lira some respite by preempting the Fed and hiking rates.
Only they didn’t.
And not only did they not hike, they made it clear that tightening would only occur once the Fed tightened and then made matters immeasurably worse by proceeding to stumble through a "roadmap" of how they planned to deal with DM policy normalization. That, combined with political turmoil, an escalating civil war (and yes, that’s what it is), and pressure on EM in general has led directly to further weakness for TRY:
We bring this up because Turkey, like Brazil, is a country to keep an eye on and not only because of the prominent role it will ultimately play in deciding the fate of Syria’s Bashar al-Assad, but because much like Brazil, things seem to get worse by the day both economically and politically. Take Thursday for instance, when inflation came in hot, prompting Goldman to suggest that the central bank had indeed missed its window. Here’s Goldman:
Headline and core inflation accelerated sequentially in August, on broad-based price increases. This trend will likely continue, as renewed exchange rate weakness passes through to domestic prices in the coming months, and food disinflation loses momentum. We continue to forecast end-2015 CPI at 8.2% but with moderate upside risks.
In our view, the CBRT may have missed an opportunity to start normalising/simplifying its policy framework by keeping all policy rates unchanged in the August MPC meeting. This raises the risk of earlier and more aggressive rate hikes than we have been forecasting. We reiterate our long-held Conviction View to own Turkey protection, through 5-year CDS spreads.
And a bit more from Credit Suisse:
We are revising our headline inflation forecasts higher. Following the lira’s depreciation in August and the recent upside surprises to food price inflation, we are revising our end-2015 inflation forecast to 8.6% from 7.8% previously and our end-2016 inflation forecast to 7.4% from 7.2% previously.
And for a more general assessment of the growing economic malaise we got to BofAML:
Turkish macro seems to be facing a perfect storm as both domestic and external uncertainties are weighing down on GDP growth. The run rate of GDP growth has slowed down to 2%, TRY weakness keeps CPI inflation sticky close to 8%, weak FX revenues and consumption driven GDP growth keeps CAD around 6% of GDP, and CBT is unlikely to deliver market’s expectation of sharply higher TRY rates to put an end to TRY weakness. Since TRY is still not at oversold levels and further EMFX cannot be ruled out, we believe macro will not be supportive of Turkish asset prices in the near-term. In the meantime, we expect some populism in macro policies until the November elections, as stakes are high.
So all around bad. Of course one of the main drivers of the market's declining confidence in Turkey is the political turmoil that's gripped the country since June when AKP lost its parliamentary majority for the first time in over a decade throwing President Recep Tayyip Erdogan’s plan to transform the country’s political system into an executive presidency into doubt. Not one to give up easily (especially when it comes to consolidating his power), Erdogan proceeded to launch an ad hoc military offensive against the PKK in an attempt to undermine support for the pro-Kurdish HDP ahead of new elections. Now, with elections set for November, the witch hunt has officially kicked into high gear.
Earlier this week, in a move dubbed "unsubstantiated, outrageous and bizarre" by Amnesty International, Turkey arrested three Vice News journalists (two British citizens and an Iraqi) for allegedly "engaging in terror activity" on behalf of ISIS. This is of course just the latest example of Ankara using the NATO-backed ISIS offensive as an excuse to eradicate pro-Kurdish sentiment. According to The New York Times (and according to common sense) the reporters' only real "crime" was "covering the conflict between Kurdish separatists and the Turkish state." The British journalists were reportedly released on Thursday while Mohammed Ismael Rasool (the Iraqi) was not.
But the media crackdown didn't stop there. On Tuesday, Turkish police raided Koza-Ipek Media which, as AFP notes, "owns the Turkish dailies Bugun and Millet, the television channels stations Bugun TV and Kanalturk and the website BGNNews.com and is close to Erdogan's political rival, the US-based Muslim cleric Fethullah Gulen."
"I'm worried that operations targeting the media will create great concern across the world about the state of democracy in Turkey," Turkey's new EU affairs minister and HDP member Ali Haydar Konca said.
Indeed. Perhaps even more alarming were reports that Ankara will now set up a terrorist tip hotline, complete with monetary awards. "Turkey to reward informants on tips about 'terrorists'", Bloomberg reported on Monday, citing Gazette.
It also looks like Erodgan will station soldiers at the polling stations when Turkey goes back to the ballot box in November - you know, for "security" purposes. Here's Hurriyet:
Security forces will take all necessary measures to ensure election safety on Nov. 1 in a bid to avoid the repetition of problems that allegedly occurred in the June 7 polls, President Recep Tayyip Erdo?an has said.
Yes "the problems", namely that AKP lost its parliamentary majority. But that's nothing the military can't solve. Here's Erdogan himself (note the chilling passage in bold):
"I believe our government, our Armed Forces and Interior Ministry will take all measures for election safety so that we’ll get through [the polls] with minor damage. I presume that what happened in the June 7 [elections] will not be repeated on Nov. 1 as part of election safety."
And because that still isn't enough, Turkey is now arresting the relatives of its own (dead) soldiers for criticizing Erdogan:
From Bloomberg, citing Anadolu Agency:
Turkey arrests relative of killed soldier on Erdogan insult. Man allegedly insulted President Tayyip Recep Erdogan during memorial ceremony for Turkish soldier killed in roadside bombing last month.
In this type of environment - that is, in a country where the President is not only willing to start a civil war to regain an absolute majority in parliament on the way to forcibly changing the constitution, but also willing to throw journalists in prison for attempting to cover said civil war - it becomes difficult to distinguish real escalations from potential false flags. After all, the more "attacks" blamed on PKK, the less voter support for HDP, which is why it's easy to cast a wary eye towards Wednesday's Molotov cocktail attack on an AKP district branch, an attack which was promptly blamed on "a group of PKK supporters" by AKP mouthpiece Daily Sabah:
A goup of PKK supporters have attacked an AK Party district branch with Molotov cocktails on Wednesday night in the eastern Bitlis province's Hizan district. No one was injured in the attack but the branch office was reportedly left unusable.
The district firefighters immediately intervened and managed to extinguish the fire in the building.
AK Party Provincial Head Nesrullah Tanglay told the state-run Anadolu Agency reporters: "Through these attacks, they are trying to downbeat our party's organizations before the elections on November 1."
Bear in mind that this is all being carried out with the explicit blessing of Washington and NATO thanks to the fact that Erdogan has managed to trade a brutal crackdown not only on his political rivals (on the way to negating the results of a free election and thereby completely undermining the democratic process), but now also on the press (who are apparently only allowed to cover the story if they're willing to parrot the AK Party line), for a promise to assist in the campaign against ISIS which is of course really nothing more than a thinly veiled effort to invade a sovereign country and overthrow its government. And as if that weren't enough, Anakara will now pay the public for terrorist "tips" dialed in to a dedicated hotline.
What absolutely must not be lost in all of this is that this is i) a NATO member and ally of The White House, and ii) an investment grade country.
And because, when taken together, all of the above is somewhat disconcerting for all kinds of reasons, we'll close with a bit of comic relief, via Bloomberg:
Erdogan to set up Presidential TV channel before election. 24-hr news channel to broadcast Turkish President Recep Tayyip Erdogan’s speeches and events Zaman reports, without saying where it got the information.