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Erdogan’s Turkey a warning for Brexit Britain


Markets don’t like governments engaging in unnecessary economic self-harm, and after numerous warnings and cautions on its unsustainable economic policies, investors are now abandoning Turkey —Brexit Britain should beware.

It is easy to forget how far Turkey has fallen in a few short months. At the beginning of 2018 the country was the darling of emerging markets, its benchmark BIST 100 at a record high and the dollar worth just under four lira.

There were warnings that its economy might be running hot, and its corporates had issued large amounts of dollar-denominated debt, but most were confident Turkey’s central bank would step in to curb inflation should it get out of hand.

But Turkey’s authoritarian president Recep Erdoğan has rejected that consensus by saying he will exert control over the central bank to stop rate hikes, and vowed to not let international markets impact the populist economic programme which could cripple his country’s finances.

Erdoğan's obstinacy, and an unhelpful sanctions row with the US, has led investors to flee from Turkey, sending its markets and currency spiralling downward.

Italy has been a similar story this year, although the situation is far less severe than in Turkey.

The country has over the past couple of years experienced an economic renaissance with many of its crisis demons dealt with and strong economic fundamentals. That meant investors waited right up to the very last minute before pulling capital from Italy.

But the formation of a coalition government between the Five Star Movement and Northern league, who have promised to enact their populist agenda, has worried international investors in the country.

This has been exemplified by shares in the country's strongest bank, Intesa Sanpaolo, slipping almost 25% since the formation of the new government.

Both Turkey and Italy were predicted to have bumper IPO years, with companies lining up to tap international equity investment.

But the political volatility in both countries has shattered the dreams of many issuers and smashed the prospect of increased issuance from either country.

Investors have not yet turned on the UK, Europe’s strongest and deepest equity capital market, but macro sentiment is certainly not as strong as it has been in the past.

Sterling has gradually fallen against both the dollar and the euro over the course of the year as the UK’s negotiations with the EU have steadily become more difficult.

Confidence has fallen in the UK government, and trade secretary Liam Fox’s declaration that a “no-deal” Brexit was now the most likely outcome next March has caused a degree of nervousness over whether the UK might be veering towards a cliff.

But most investors and bankers say behind closed doors that they believe, despite all the rhetoric, that the UK will eventually swallow some of its pride in order to strike a good deal with the EU.

Investors don’t like politicians sacrificing economic sense in favour of populism.

If prime minister Theresa May’s government allows the hard right of her own party to push the country towards an exit from the European Union without a deal, or with a damaging one, it could cause a reversal in sentiment akin to that seen in in Turkey.

This would be heightened if a hard Brexit caused a deeper economic crisis by slowing growth and hurting UK corporate revenues, which would pressure the highly indebted UK corporate sector.

A recession is not off the table for the UK, and obstinate politics could fuel the fires that burn its domestic economy.  

Sensible compromise options, like remaining in the European single market, have been on the table throughout Brexit negotiations.

Most investors still trust that the UK remains a logical and sensible nation with competent non-reactionary politicians, who will do the right thing to preserve the its long-term future.

But investors won’t bet on a country which is likely to cause them losses, through self-inflicted political stupidity, and if politicians in Westminster betray their trust, then they will just as surely start selling UK risk.

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