Traders at the Istanbul Stock Exchange, Turkey (Photographer: Staton R. Winter/Bloomberg News)

El-Erian, BlackRock Flag Turkey Risk as U.S. Eyes Sanctions

(Bloomberg) -- Turkey said all the right things Thursday yet offered scant evidence for how the largest Middle Eastern economy will dig out of its worst currency crisis in decades. To make matters worse, Treasury Secretary Steven Mnuchin threatened more sanctions if the nation didn’t release a U.S. pastor.

In a rare half-hour long conference call, Turkey’s Treasury and Finance Minister Berat Albayrak told about 6,000 global investors that he won’t impose capital controls. He also underscored the need to rein in inflation and narrow the worst current-account deficit in years. Turkey’s lira jumped after his remarks, while giving back most of its gains after Mnuchin said he had more sanctions at his disposal. The nation’s stock gauge slid to an 18-month low.

"The real issues are the economic policies," said Shamaila Khan, director of emerging-market debt at AllianceBernstein in New York. "The reaction to the sanctions from the U.S. would have been very different if the government was following orthodox policies."

Albayrak’s comments provided a glimpse into the new economy chief’s thinking as a spat with Washington over a detained U.S. pastor roils Turkish markets. The lira lost as much as a quarter of its value within two weeks of U.S. sanctions against members of President Recep Tayyip Erdogan’s government. Turkish investor anxiety, as measured by the lira’s one-month implied volatility, fell by the most in almost two months on Thursday.

It’s unlikely that Turkey will take steps such as tightening fiscal policy, raising rates to control inflation and restoring the independence of the central bank, said Kathy Jones, chief fixed-income strategist at Charles Schwab Inc. She expects more sanctions.

"It still looks like we’re headed to more conflict,” Jones said. "Neither side seems to be backing down yet."

Here’s what investors and analysts said about the call:

Mohamed El-Erian, chief economic adviser to Allianz SE and Bloomberg Opinion contributor

  • "Turkey is trying to rewrite the crisis management chapter in the playbook for emerging markets. It’s trying to go without interest rate hikes. It’s trying to do it without the IMF. That’s hard. It’s not impossible, but it’s hard."
  • It’s time to reduce Turkish exposure as restrictions on shorting the lira only offer short-term relief, he said.
  • El-Erian said he’s concerned by potential corporate bankruptcies, pressure on banking system, higher inflation and the odds of a recession.

Wei Li, BlackRock Inc.’s head of iShares EMEA strategy in London:

  • "There is still skepticism that the authorities take the necessary steps to address the country’s issues."
  • "The market turmoil in Turkey is the latest in a series of fragilities amplified by gradually tightening financial conditions this year. Investors should prepare for further bouts of volatility ahead."
  • "We see several of Turkey’s challenges being idiosyncratic in nature, however, having said that, the dent to broad EM sentiment is undeniable, and we see a bumpy ride ahead."

Julian Rimmer, a London-based trader at Investec Bank Plc:

  • "There’s denial and a refusal to accept market realities and the fact they will have to hike rates and/or cut spending very sharply. There’s no way of getting round it. It seems like they think they can."
  • "The only modicum of encouragement was that he expressed commitment to cutting spending and said they’d already started that."

Esther Law, an emerging-market debt manager at Amundi in London:

  • “I came out of it marginally more reassured.”
  • “The question is how are they going to strike a balance,” between fiscal discipline, growth and monetary policy, while letting liquidity normalize.
  • She said she believes the minister understands that the government must accept “more modest growth compared with last year, which was a phenomenal one."

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