Turkey balances monetary policy decisions and their military involvement in Syria. 

Monetary policy decision by the Central Bank of Turkey (CBRT) on Wednesday, February 19th     

Market Relevance: In the course of its current easing cycle that began in July 2019, Turkey’s Central Bank (CBRT) has already delivered 1275bps of rate cuts. With the key policy interest rate at 11.25% and headline inflation running around 12% YoY, ex-post real interest rates in Turkey are in negative territory, while ex-ante real interest rates are close to zero (using consensus expectations for 2020 year-end inflation of ~11% YoY). As such, further declines in CBRT’s policy rate will matter incrementally more for markets and the TRY in particular.

Gramercy View: Although the TRY has been on a steady weakening path since mid-January, we believe that the authorities might opt for yet another interest rate cut, albeit of a small size. Turkey’s economic policy mix this year will prioritize stimulating domestic activity and employment, regardless of potential negative spillovers into the economy’s structural vulnerabilities, which leaves us concerned about monetary policy miscalculations and keeps us cautious on the credit outlook. Given the real interest rate buffer erosion and deterioration in current account dynamics, policy mistakes by the CBRT are likely to generate pressure on Turkish assets, especially the TRY.

Turkey’s military involvement in Syria’s Idlib province among rising tensions   

Market Relevance: Gradual fading of elevated geopolitical risks associated with Turkey’s military activities in Syria helped support the significant rally in Turkish assets since October 2019. Accordingly, a new significant military commitment, this time in Idlib, has the potential to reignite market concerns.

Gramercy View: As Turkish troops and Syrian government forces continue to clash in the northern Syrian Idlib province, the last rebel stronghold, a key concern from a geopolitical risk point of view is a breakdown in Turkey’s relationship with Russia, President Assad’s key ally. We are of the opinion that President Erdogan will prioritize remaining on good terms with the Kremlin and thus, will show restraint on the ground in Idlib to avoid a possible direct confrontation with Russian personnel. However, the risk of an inadvertent escalation has increased and the potential for a renewed influx of refugees from Idlib into Turkey is non-negligible and would put an additional strain on the already fragile economic and political climate in the country. As such, geopolitical risks in Turkey’s credit profile are on the rise again.

Local elections in the Dominican Republic on Sunday, February 16th

Market Relevance: The collective result of the municipal elections should provide a signal of current voter sentiment and momentum ahead of the presidential and legislative elections on May 17th.  There is a degree of uncertainty regarding the fiscal trajectory ahead of and after elections.

Gramercy View: We expect the opposition party Partido Revolucionario Moderno (PRM), to perform well in the local elections and gain some ground against the ruling Dominican Liberation Party (PLD). While there is not a direct parallel between municipal and national preferences due to strong local personalities, the outcome should provide some indication of latest voter preferences. The presidential election is likely to be close with the opposition candidate, Luis Abinader, currently ahead in the polls. We anticipate some moderate fiscal slippage this year albeit we do not foresee a major change to policy regardless of the outcome of the election. While the PRM may have more interest in pursuing fiscal reform, with the exception of privatization of Punta Catalina, their ability to do so would likely be more limited than that of the PLD. We foresee continuation of a closely managed currency with supportive monetary conditions, particularly in the run-up to the vote. However, we envisage some tightening in liquidity post-vote.

Please contact our Co-Heads of Sovereign Research with any questions:

Kathryn Exum, Senior Vice President, Sovereign Research Analyst
[email protected]

Petar Atanasov, Senior Vice President, Sovereign Research Analyst
[email protected]

This document is for informational purposes only. The information presented is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Gramercy may have current investment positions in the securities or sovereigns mentioned above. The information and opinions contained in this paper are as of the date of initial publication, derived from proprietary and nonproprietary sources deemed by Gramercy to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. This paper may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this paper is at the sole discretion of the reader. You should not rely on this presentation as the basis upon which to make an investment decision. Investment involves risk. There can be no assurance that investment objectives will be achieved. Investors must be prepared to bear the risk of a total loss of their investment. These risks are often heightened for investments in emerging/developing markets or smaller capital markets. International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation, and the possibility of substantial volatility due to adverse political, economic or other developments. The information provided herein is neither tax nor legal advice. Investors should speak to their tax professional for specific information regarding their tax situation.