What’s in store for Turkey’s economy and investment flows as political unrest takes a toll?

The future of the Turkish economy is back on the financial press’ front pages following the political upheaval spurred on by Turkish authorities’ arrest of Istanbul Mayor — and Turkish President Recep Tayyip Erdogan’s most prominent rival — earlier on Wednesday. While the Turkish government is scrambling to contain the damage, the events have brought the question of Turkish economic stability back in the spotlight after a brief period of relative stability, Bloomberg reports.

ICYMI- Turkish markets fell by the most in the world on Wednesday after the arrest, with the TRY also seeing a sharp sell-off falling nearly 12% to hit a new all-time low of 42 against the greenback, Reuters reports.

Markets have since stabilized: The main stocks index rose 1.1% yesterday, paring some of its losses from earlier, though the banking index dropped 4.6%. The TRY also gained some ground, stabilizing at 38 per USD, still down 0.3%.

A lot of it comes down to the central bank’s swift response to the turmoil: The central bank reportedly sold nearly USD 10 bn in foreign currency reserves in an attempt to prevent a deeper currency crisis — the largest single-day intervention on record, Reuters reports. Analysts say the central bank did not directly intervene in the exchange rate but used public banks to conduct transactions at an unprecedented scale. Authorities also moved to control public reaction, blocking some communication platforms, throttling internet access, and banning protests across Istanbul, Bloomberg added.

Foreign investors, who had begun returning to Turkey following recent economic reforms, are rattled. The arrest is a “reminder that President Erdogan intends to tighten his grip on power even more,” said senior FX analyst Piotr Matys. Investors fear growing government intervention and capital flight could derail Finance Minister Mehmet Simsek’s efforts to restore economic stability by unwinding years of unorthodox economic policies — also known as Erdonomics.

Analysts are broadly optimistic: Despite Wednesday’s turmoil, Goldman Sachs economist Clemens Grafe suggested that foreign selling is “likely to be limited,” given that the turmoil is political rather than directly tied to economic policy. However, rebuilding investor confidence will take time, he said. Others, including an analyst at Control Risks, expect inflation to rise on the back of shaky confidence in the TRY and in the economy, which could prompt new rate hikes as the central bank continues to prioritize tamping down on inflation, CNBC reports.

The biggest question is whether domestic investors will rush into USD, further pressuring the TRY. “Panic selling from both foreigners and locals appears to have cooled off,” said MUFG Bank Turkey Treasury Head Onur Ilgen, adding that the potential currency switch is “the most important issue to be tackled by policymakers.”

MARKETS THIS MORNING-

Asian markets are mixed in trading this morning, mirroring uncertainty and volatility across global markets, including on Wall Street. Japan’s Nikkei was up 0.5% after positive inflation figures showed the headline figure easing in February from the previous month, while Hong Kong’s Hang Seng slipped 0.6%. China’s CSI 300 was up 0.2%.

Over on Wall Street, futures point to a weak open after stocks struggled to continue the rally brought on by the Fed’s decision to hold rates steady on Wednesday.

THE CLOSING BELL-

The DFM rose 0.3% yesterday on turnover of AED 456.7 mn. The index is down 0.6% YTD.

In the green: Al Firdous Holdings (+2.4%), Talabat Holding (+2.1%), and ENBD REIT (+1.9%)..

In the red: Emirates Investment Bank (-9.8%), Dubai Islamic Ins. and Reins. Co. (-3.7%) and National Cement Company (-3.0%).

Over on the ADX, the index fell 0.7% on turnover of AED 940 mn. Nasdaq Dubai was down 0.1%, and up 0.7% YTD.

CORPORATE ACTIONS-

Budget retailer Union Coop will distribute AED 282 mn in dividends for 2024, according to a DFM disclosure (pdf). The company will distribute AED 244.4 mn as a 14% return on its paid-up capital, while the remaining AED 37.6 mn will be provided as a 5% return on shareholders' purchases.

Fujairah Building Industries’ shareholders approved a 30% dividend payout for FY 2024 equivalent to AED 40.8 mn, according to an ADX disclosure (pdf).

Union Properties’s general assembly will discuss reducing its capital to AED 2.9 bn, down from AED 4.3 bn, according to a disclosure (pdf) to the DFM. The AED 1.4 bn reduction, or 33.4% of its total issued capital, is equivalent to the firm’s accumulated losses as of the end of 2024, it said.

Al Ansari Financial Services will distribute dividends of AED 315 mn, representing 420% of the firm’s paid-up share capital, it said in a disclosure (pdf) to the DFM.