Recep Tayyip Erdogan is a man who likes to have his cake and eat it too. And if there’s still any cake left after he’s had his fill, he’ll rub some in your face just to spite you.
“Sooner or later, we will receive the F-35s as well as their parts”, Erdogan said Saturday, during a speech in Istanbul. “Inshallah, S-400s will arrive in our country, too.”
To the uninitiated, it won’t be immediately clear why that quote from Erdogan’s Saturday speech is funny. To Turkey watchers and emerging market fund managers, that kind of obstinance from Erdogan should be expected, but this weekend’s bombast won’t be welcome news.
Over the past several months, Turkish assets have been beset by a laundry list of concerns, including a slumping economy, depleted foreign reserves, the erosion of democracy, the absence of central bank independence and the S-400 question, which threatens to rekindle Ankara’s on-again, off-again diplomatic spat with Washington.
The rumor mill is perpetually alive with speculation about whether Erdogan will acquiesce to US demands that Turkey cancel (or at least delay) plans to take delivery of the Russian missile-defense system. Ankara’s purchase threatens to derail Turkey’s participation in the F-35 program, risks US sanctions and, more broadly, highlights Erdogan’s tense relationship with NATO.
The lira is prone to being whipsawed by competing headlines around any and all of the issues mentioned above. The S-400 question is no exception. During Saturday’s speech, Erdogan struck a comically belligerent tone, insisting that not only is the purchase a “done deal”, but Turkey may even take delivery early. To wit:
It is definitely out of the question for us to step back on the issue of S-400s, it is a done deal. Our deal was to have the S-400s delivered to us by July; they will probably bring that forward.
Apparently unsatisfied that he’d adequately communicated his stance on this thorny issue, Erdogan proceeded to muse about Turkey’s role in the next generation of Russian missile systems.
After the S-400s, the S-500s are also considered and there will be co-production of S-500s as well.
To say that’s not what the West (politically speaking) and EM watchers (from the perspective of markets) want to hear would be an understatement. With the central bank hamstrung by Erdogan’s legendary disdain for higher rates, the lira is a sitting duck and responds to each and every headline, no matter how trivial. It recently rallied back below a 6-handle, but the situation is tenuous, at best, with the currency still sitting near the weakest levels since October.
Meanwhile, Turkish stocks have fallen for four consecutive weeks and five out of the last six.
On Friday, the lira rallied on reports that AKP would not in fact seek to tap a separate stash of reserves in an effort to plug budget holes. That plan, initially tipped last Monday, prompted still more concerns over the country’s fiscal position and Erdogan’s penchant for running roughshod over decorum and thumbing his nose at foreign investors who Turkey desperately needs to curry favor with over the longer-term.
Read more: Lira, Turkish Stocks Crash (Again)
Erdogan’s S-400 comments risk exacerbating tension with the Trump administration just days after Washington rolled back steel tariffs which were hiked to a draconian 50% last August amid the Andrew Brunson soap opera.
Two Fridays ago, Turkish banks were seen selling dollars in thin Asian trading, a laughably desperate attempt to prop up the currency.
In a testament to the urgency of the situation, the Turkish banking regulator late last week called on banks to do their patriotic duty to halt dollarization. “All lenders should take ownership of the TurkishÂ lira”,Â BDDK’s Mehmet Ali Akben said Friday. “We expect you to work for an end to dollarization of savings.”