Political risks are rising for Turkish assets

TURKEY - In Brief 17 Feb 2016 by Atilla Yesilada

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Since the turn of the year, I’ve been very constructive on TL denominated assets, despite the visible tensions with Russia and the massive sell-off in the EM universe. After the developments of yesterday, I’m less so on account of two political risks having changed nature. First the Constitutional Committee (CC) was disbanded by the chairman, Speaker of the Parliament, Mr. Ismail Kahraman, which means that AKP is now free to seek a referendum or early elections on the executive presidency issue. Secondly, it is almost certain that Ankara has proposed plans to White House to establish a “secure zone” around the border town of Azez in Syria to house the potential refugee flow, which may exceed 300K as the siege of Aleppo is underway. I still don’t expect a unilateral Turkish incursion into Syria, but a full-blown proxy war between Turkey and Russia might have bigger spill-over effects in Turkey than I had previously anticipated. Our Monthly Report remains in progress and will cover these issues in more detail, but it suffices to say that Turkey has once again failed to draft a new constitution, the presidential issue becoming the sticking point. As CHP withdrew from the CC, AKP publicly entertains the idea of pressing ahead with MHP and HDP, but convincing these two parties to a presidential system is not very likely. I also don’t think AKP will try very hard. Essentially, CHP’s abrupt maneuver gave AKP a blank check to either force a vote on the general floor on a constitutional amendment, hoping some opposition deputies would support it, or to seek early elections whenever polls appear in the party’s favor. I had hoped that the CC will work at least for six months, del...