Turkish assets remain under pressure

Turkey’s President Erdogan has failed to convince markets over recent events, which have seen the Turkish lira come under heavy pressure.

Fund manager WisdomTree’s associate director and equity strategist, Aneeka Gupta, said a much-awaited speech by Erdogan caused more damage across financial markets, as it lacked any compromise and relied on feelings of defiance and nationalism, with a belief that the crisis could be met by local measures, such as citizens selling gold and foreign currency holdings for the Turkish lira. Markets were also disappointed by lack of policy initiatives, namely a rate hike by the Turkish treasury and finance minister.

The Turkish currency crisis has led to concerns that European banks, such as BBVA, UniCredit and BNP Paribas, are significantly exposed to Turkish banks, and therefore the Turkish corporate sector which may be unable to roll over their lending. This has led to concerns of a tail risk scenario, Gupta said, but added that it is currently overstated. However, the doubling of tariffs by US President Donald Trump, on imports of aluminium and steel from Turkey has highlighted failure in talks between the two countries.

Separately, BlueBay Asset Management’s Mark Dowding commented: “It seems that the Erdogan administration may now have missed its chance to regain any central bank credibility and even when rates do rise, it is likely to be a case of too little too late.” As a result, Dowding said there would be an acceleration in the withdrawal of wholesale funding from an economy that needs to attract overseas capital. This could lead to further Turkish losses, while higher interest rates could lead to an economic slowdown and rising non-performing loans.