Turkey: Failed coup continues to cause damage to the economy - Rabobank

Piotr Matys, EM FX Strategist at Rabobank, notes that the failed coup still caused damage as Turkish stocks fell the most in three years and yields spiked across the curve when the markets reopened on Monday following turbulent events over the weekend.

Key Quotes

“The Borsa Istanbul 100 Index plummeted 7% (the most since June 2013) and almost fully reversed the rally from the post-Brexit low. The yield on the benchmark 10-year bond increased sharply by 66bps to 9.5%. It was a volatile day for the lira, which initially firmed against the US dollar, but was unable to hold to its gains.

While the worst case scenario was avoided, capital inflows are likely to slow down and could be at least partially reversed in the short-term as uncertainty has increased and Turkey also faces the risk of being downgraded.

Moody’s warned that it may downgrade Turkey’s Baa3 credit rating to junk as the failed coup could “significantly” weigh on the Turkish economy, which relies heavy on capital inflows to finance its current account deficit. Fitch commented that Turkey’s ratings pressure “will depend on the extent to which the government’s reaction deepens political divisions and weakens institutional independence”. The ratings agency also warned that thousands of arrests “could put further strains on institutional integrity amid plans to formally increase the powers of the presidency.”

Following their meeting on Monday, EU foreign ministers issued a joined statement urging for “restraint to be shown by Turkish authorities, including the police and security forces. All must be done to avoid further violence, to protect lives and to restore calm.” The EU also emphasized that the rule of law must be respected. Various other European officials expressed concerns about the arrests of judges and prosecutors amid the crackdown that followed the failed coup. Reportedly 20,000 suspected plotters have been detained or suspended. Amongst them are military officers, soldiers, judges, prosecutors, police officers and civilians.”