By Canan Sevgili and Mirac Dereli
(Reuters) -Turkey’s financial markets are bracing for a court ruling on Monday that could oust the leader of the main opposition party following months of political turmoil that has roiled Turkish stocks, bonds and the lira.
Monday’s ruling is the latest chapter in a legal crackdown on the main opposition to President Tayyip Erdogan that has been unsettling investors since March, when the arrest of Istanbul Mayor Ekrem Imamoglu – Erdogan’s main rival – triggered a major selloff.
The turmoil has put a fresh focus on Turkey, an emerging market economy that has in the last two years seen a return of some of the foreign investment that vanished in previous years over the government’s unorthodox policies.
The latest ruling follows a September 2 court decision that ousted the Istanbul provincial head of the opposition Republican People’s Party (CHP), citing irregularities at a local party congress.
Markets will be closely watching Monday’s ruling, and the political fallout.
“It is a very important moment for Turkey,” said Giulia Pellegrini, portfolio manager at Allianz.
Below are five charts on how Turkey’s financial markets have fared in recent months.
EQUITIES SUFFER
Turkish stocks tumbled after the September 2 ruling, with Istanbul’s benchmark index dropping as much as 5% during the session, its worst daily performance in about six months. Losses in the banking index were even bigger.
Since Imamoglu’s arrest, the benchmark and banking indexes are down 15% and 10% in dollar terms, respectively.
The declines are in sharp contrast to wider emerging markets. The MSCI Emerging Markets Index has gained more than 23% since the start of the year, compared to a loss of some 8% in the index provider’s Turkey benchmark, representing the country’s most liquid and sizeable stocks that foreign investors seek exposure to.
LINGERING LIRA
On the day of Imamoglu’s arrest, the lira weakened more than 2.6% against the dollar and hit a record 42.00 level with the speed of the move sending shockwaves through the markets.
The currency has returned to a more gradual pace of depreciation since then, though it has still weakened more than 9% – making it one of the worst performers across emerging markets.
That comes against the backdrop of the dollar waning around 10% this year, on track for its worst year in more than two decades – usually a boon to emerging market currencies.
Grant Webster, portfolio manager at Ninety One, said he did not expect a repeat of the lira’s steep plunge on Monday, pointing to the currency’s more muted reaction in early September, with authorities standing ready to react swiftly.
“They put processes in place which allow them to more quickly sell dollars and to tighten liquidity – so they can do it very quickly,” Webster said.
FOCUS ON CENTRAL BANK
Turkey’s hard currency reserves have long been a flash point, especially when authorities had to draw on them to shore up the lira.
Following Imamoglu’s arrest, the central bank sold some $57 billion in reserves. In the days following the early September ruling, traders said the central bank sold $4 billion-$5 billion – denting its rebuilding effort after the March drawdown.
Politics have also shaped interest rate decisions.
The March markets rout prompted policymakers to abandon their easing push and hike the policy rate by 350 basis points to 46% in April.
After holding steady in June, the central bank resumed easing in July, cutting by 300 and 250 basis points in July and September respectively to 40.5%.
FIXED INCOME PRESSURES
Local bonds have oscillated this year, with yields scaling five-month highs in mid-April, and ticking up again earlier this month.
While external debt also showed big swings, longer-dated dollar bonds are trading at their highest in a year.
Credit Default Swaps (CDS) – a proxy for the costs to insure exposure to a country’s external debt against default – have steadily come down, and are now not far off pre-March levels.
However, some expect this could change on Monday.
“The case could reshape Turkish politics and increase the political risk premium currently embedded into Turkish assets to a new level,” BBVA analysts wrote in a note.
(Reporting by Canan Sevgili, Mirac Dereli, Marc Jones and Libby George;Editing by Karin Strohecker and Helen Popper)
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