Turkey’s problems won’t go away after Brunson’s release

Turkey’s financial problems and its fraught relations with the United States are set to persist despite the release of U.S. pastor Andrew Brunson from custody on Friday.

The market reaction to the end of Brunson’s two-year incarceration was at first muted then turned negative, showing that his freedom will not be enough to allay investor concerns about putting money into the country.

Brunson was released from house arrest by a court in western Turkey on Friday under U.S. pressure after witnesses mysteriously withdrew key allegations. But the decision to free the pastor, who has based himself in Turkey for two decades, was tainted by the presiding judge, who sentenced him to three years and one month in jail for aiding and abetting terrorist organisations. He was released due to time served and good behaviour.

Turkey’s already overheating economy was pushed to the verge of full financial crisis in August after Brunson’s detention prompted U.S. President Donald Trump to impose sanctions on two Turkish ministers and double tariffs on Turkish steel and aluminium imports. Washington and several NGOs insisted he was completely innocent of all charges.

And now Turkey’s economy is facing deep recession after a slump in the lira of almost 40 percent against the dollar led to a surge in inflation and interest rates. Despite Brunson’s release, several Americans, including local consular workers, remain behind bars, charged with terrorism offences related to a failed military coup in July 2016. Thousands of journalists, academics, judges and state employees are also jailed on the same charges.

Turkey is also threatening to extend its military operations in Syria to include areas under the control of the United States and its Kurdish allies, a pledge repeated by President Recep Tayyip Erdoğan on Thursday.

The lira fell 0.2 percent to 5.93 against the dollar late on Friday, erasing gains made before the court’s decision, while the main BIST-100 share index rose 1.7 percent to 96,313.

Tim Ash, a senior emerging markets strategist at Blue Bay Asset Management in London, said whatever the result of the Brunson trial, Turkey was faced with severe economic problems that would most likely require it to seek help from the International Monetary Fund.

Despite Erdogan’s opposition to seeking financial aid, Turkey looks set to go cap in hand to the Washington-based fund within six months, and if not shortly after local elections in March, Ash said in an e-mailed note to clients on Friday.

Turkey’s economic frailties are epitomised by inflation, which surged to almost 25 percent in September. Producer price increases are at almost double that level. The central bank’s main policy rate of 24 percent, raised from 17.75 percent in September, now appears insufficient to tame price increases.

Meanwhile, Treasury and Finance Minister Berat Albayrak, Erdogan’s son-in-law, announced an anti-inflation programme this week that failed to mention monetary policy. Instead he announced that many businesses had agreed to cut prices by at least 10 percent. They would receive stickers to put in their shop windows underscoring support for the government’s efforts, he said.

Investors have reacted to Albayrak’s initiative with some bewilderment. Paul McNamara, who is in charge of emerging market investment at Swiss firm GAM, labelled the plan “nonsense”, saying it would pressure company margins further.

Turkish firms are saddled with some $170 billion in foreign currency debt that they must rollover or repay within a year, a frightening prospect after the lira’s slump. Several prominent businesses have already applied to banks, most of them local, to restructure tens of billions of dollars in loans. At the same time the government is pressuring banks to lower interest rates on loans even as inflation accelerates.

Halkbank, the state-run lender under control of Turkey’s sovereign wealth fund, chaired by Erdoğan, is under investigation by the U.S. Treasury for breaking sanctions on Iran and could receive billions of dollars in fines. Some Turkish commentators have speculated that Ankara may have received assurances from Washington that any fine would be very limited in scope. But that would break with the Treasury’s approach to such transgressions by other foreign lenders.

Ilnur Çevik, an adviser to Erdoğan, wrote in a newspaper column on Friday that he expected “dramatic changes” in U.S.-Turkish relations spurred by Brunson’s release. Still, Çevik cautioned that the elimination of the Brunson case “may not erase all the hitches we are experiencing”.

“There are still many outstanding issues, especially the American support given to the militants of northern Syria who are offshoots of the PKK terrorist group that has been waging a secessionist campaign in Turkey for the past four decades,” he said.

“What is sad is that Washington is not eyeing Turkey from the same window, as it does some of its vital allies like Israel.

The opinions expressed in this column are those of the author and do not necessarily reflect those of Ahval.