Political risk back in Turkey, LOIM’s chief strategist says

Salman Ahmed, chief global strategist at Lombard Odier Investment Managers, assesses political risk is back in Turkey after Turkish Prime Minister Ahmet Davutoglu decided to step down from his role.

Ahmed explains that Davutoglu’s decision, which comes after a power struggle between Erdogan and Davutoglu, is likely to extend uncertainty in the country “as the unfinished election cycle is now likely to expose Turkey’s sharp macro imbalances.”

LOIM’s chief strategist considers Turkey as one of the most vulnerable major EM country on the back of high leverage and external imbalances.

“The sharp rise in political risks are only likely to put the spotlight further on the country’s key economic weakness,” he says.

“Going forward, we expect uncertainty to remain high till a new PM is appointed, though further increase in Erdogan’s powers is now likely to be a structural concern. Moreover, it remains to be seen if CBT will reverse course on monetary policy given renewed weakness in the lira.

“For the broader EM complex, it is a sentiment shock coming after several weeks of strong performance and is unlikely to damage the underlying trend of sustained recovery as major central banks either remain cautious or in easing mode keeping advanced economy rates low or negative.” Ahmed concludes.

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