16 Oct 2019
Earlier this year we wrote that Turkey’s populist policymaking and economic mismanagement could conceivably take it down a similar road to Argentina (before this summer’s shock primary election result) i.e. result in an IMF bail out that would slowly put it on a sustainable growth path. That was before the Turkish government unleashed a geopolitical wrecking ball.
In our piece we pointed to Turkey’s rise in authoritarianism and resultant clampdown on personal and press freedom – all of which underpinned our cautious positioning in its sovereign bonds and currency. Turkey’s poor institutional quality, which in part explains the country’s low positioning on our political and ESG score boards, makes its military incursion of northern Syria less surprising. What did come out of the blue was the major shift in US policy, which effectively gave Turkey the green light to move into northern Syria.
Turkey’s military operation, although being executed mostly through mercenaries and proxy fighters, has been met with international condemnation. President Erdogan’s ambitions appear to be two-fold:
The humanitarian concerns are obvious, as are the concerns around a potential resurgence of terrorism under a strengthened ISIS. The question now is: will the international community manage to persuade Turkey to stop the incursion in time to prevent a self-inflicted and persistent economic write-off?
With the Syrian Democratic Forces – the name given to the Syrian Kurdish fighters who were fighting on behalf of the US – now galvanising Assad’s Syrian Regime (supported by Moscow) there is little time to act.
We believe the best-case scenario from here is that Turkey’s leadership is persuaded to halt the incursion, either due to sufficiently tough international sanctions, or due to the risks of confronting Kurdish forces supported by Assad (possibly with air cover provided by Moscow).
At the time of writing the US had imposed sanctions, albeit fairly limited in their scope. And Russia had voiced its disapproval of the incursion.
As the civilian death toll rises and reports of ISIS prison breaks hit the headlines, we think the likelihood of further sanctions and pressure will only grow. Less certain is whether these sanctions will have enough economic bite to swing the balance of risk. Unfortunately, this incursion plays into President Erdogan’s increasingly nationalist rhetoric which supports his popularity.
Turkey is home to some world-leading businesses and a highly educated workforce. Over recent history it has successfully lifted a big part of the population out of poverty. And its strategic location between east and west positions it well to capitalise on the advancement of Asian economies. However, Turkey’s current regime is doing nothing to help secure the sustainable future its people deserve and we think this warrants a cautious stance by active investors in sovereign debt.
There are some reasons for cautious optimism, though. Some of Turkey’s economic vulnerabilities have begun to heal post 2018’s currency crisis, and while this latest strategic misstep may not be Erdogan’s last, it does increase the possibility of a political change, which could lead Turkey back to a more constructive path such as that seen in the early 2000’s.