Erdogan’s Crackdown Means Dark Times Ahead For Turkey

Of all the headlines swirling around in the days following Turkey’s attempted coup, the one I found ominous and most alarming as an investor, was when the president of Turkey, Recep Tayyip Erdogan, told his supporters that the failed coup attempt was “a gift from God.” To me it was a sign that he was going to use this “gift from God,” not to open his eyes and realize that his repressive regime was extremely exclusive, but the opposite. It would effectively give him the opening he had been looking for. Now he can use the pretext of a failed coup to incite his most ardent followers to carry out acts of indiscriminate violence against the perpetrators.

There have been reports of beheadings carried out by his supporters on members of the armed forces, and now he can finally rid the entire society of any remaining opposition to his rule. There are also reports that he has rounded up secular members of the judiciary in addition to generals. Mr. Erdogan has always wanted to turn Turkey into an Islamist society, and now he has that chance. Additionally, and more alarmingly,  the failed coup attempt has emboldened him to demand the US extradite his political enemy, Mr. Fethullah Gulen, who he accuses of leading the coup, even though he denounced it. He has also demanded that Greece return the military officers who fled the country and sought political asylum there. So far Greece has only committed to returning the commandeered helicopter.

 What further complicates the entire picture, is that Turkey is a member of NATO, as is Greece, even though they have had a few military skirmishes over the decades. My fear as an investor is that Turkey, for who I have had such high hopes, will devolve into another failed state in the region.

In the past I have written articles in support of the financial hub they wanted Istanbul to be because of its geographical location, but the authoritarian regime of Mr Erdogan has made that nearly impossible. The amount of political risk injected into the market won’t make any amount of returns in Turkish equities justify the enormous risk premium required. The Turkish Lira was down 6% at the end of the trading day on Friday, the greatest drop since 2009. The Istanbul Stock Exchange benchmark index has had a nice gain of 15% YTD, but will in all likelihood experience severe volatility in the days and weeks ahead.

So what does the future of Turkey hold in my opinion? The Middle East as it stands now is a powder keg waiting to blow its top, and all it needs is the match. From Iran to Syria, and most countries in between, political tensions and terrorism are at unsustainable levels. With no superpower engaged – other than Russia which is in the area to take advantage of the situation – the failed coup and its aftermath might just turn out to be that match. If that were to be the case, without the presence of an adult in the room, the entire region will go up in flames. It is indeed sad to see that the US has abrogated its responsibility in the region, and I use the word abrogated very deliberately, because only the US can prevent the region from going up in smoke. I will be watching the global equity markets with great interest over the next few days to see if the Turkish situation has caused enough panic to generate a flight to safety. Judging by the closing numbers of the Japanese Yen on Friday, this indeed maybe happening.

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In the meantime, I would advise investors – myself included – to pull out of that part of the world in favor of other higher growth, less volatile regions.

Peter Kohli, CEO of emerging market specialist DMS Funds.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Frontera.
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