Turkey: Tensions with US and poor fundamentals to keep assets under pressure - BBH

Analysts from Brown Brother Harriman, believe that Turkish assets are likely to continue underperforming amid rising tensions between the US and Turkey and poor economic fundamentals. 

Key Quotes: 

“Turkey stands to lose more than the US does if the tensions spill over into the economic arena.  More importantly, we think that the post-coup crackdown measures taken by Turkey have basically killed its chances to enter the EU. The impact of the tourism spat will most likely pale in comparison to the lost potential benefits of EU integration.”

“Foreign reserves have steadied after falling over the course of 2015 and 2016.  At $91.5 bln in September, they cover nearly 4 ½ months of import but account for only half of the stock of short-term external debt. This is the amongst the worst in EM.  Indeed, there are only a handful in EM whose reserves are smaller than short-term external debt.  Besides Turkey, these include Malaysia, Ukraine, and South Africa. Furthermore, so-called usable reserves (which net out commercial bank FX deposits at the central bank) stand at only $28.8 bln currently.”

“USD/TRY couldn’t sustain a break below 3.40 last month and turned higher.  The low for this move was recorded on September 11.  Break of the 3.73 area sets up a test of the all-time high from January near 3.94. In between is the April 7 high near 3.75. We think the high carry currencies that were so popular earlier this year will continue to fall out of favor now that the Fed will start shrinking its balance sheet and continue hiking rates."

“With inflation likely to continue rising and the central bank likely to fall further behind the curve, we think Turkish bonds will start underperforming even more.”