Turkish financial markets continued to rally last week on renewed optimism regarding the United States Federal Reserve's (Fed) reluctance to raise interest rates in the near future. I had predicted in late 2014 that the first Fed Open Market Committee decision to raise rates would come in the second half of 2016 and that it would be the only rate hike in the 18-month interim period. It appears the solitary rate hike that the Fed did institute in the last meeting of 2015 may be the last rate hike until the second half of the year. Persistent malaise in global equity and debt markets continues to leave many developed and emerging economies vulnerable to any unforeseen external shocks. An unexpected rate hike by the Fed would be just such a shock, and it appears the Fed is doing its utmost to prevent any unexpected moves in bond and currency markets.
Turkey's benchmark equity index, the BIST 100, is up over 19 percent in 2016 making it one of the best performing indexes of the year. The BIST 100 has returned to levels last reached nearly a year ago and is within reach of breaking its all-time high reached immediately preceding the first signs of "tapering" - an end to quantitative easing - by the fed in May 2013. Should the rally continue into the summer, the BIST 100 would be in uncharted territory.
Several large-scale infrastructure projects are scheduled to come online this summer. President Recep Tayyip Erdoğan and Prime Minister Ahmet Davutoğlu recently inaugurated the Osman Gazi Bridge, which connects the two sides of the Gulf of İzmit, cutting transit time between Istanbul and Bursa by nearly an hour. Use of the bridge to the public is to take place in late May, just in time for summer vacation travel.
The third Bosporus bridge connecting the Asian side of Istanbul to the European side is also scheduled to open to traffic in the fall. Completion of the third major highway that will act as a transit road bypassing intra-city traffic will not only aid commercial enterprises but will also do wonders to alleviate traffic congestion in the inter-city area.
Commenting on the importance of public and private construction projects, Selim Oral İsmet of Gözetmen Insurance Brokerage emphasized the magnitude of backlogged delayed construction projects now being executed. "The construction sector grew only 1 percent in 2015 but is expected to grow nearly three times that in 2016," he said. "We've seen a marked increase in applications to insure construction projects this year and believe the elections in 2015 were the reason why many construction companies put off investments until this spring. The multiplier effect that comes with new construction projects leaves us hopeful that the current run-up in equity markets may continue as the job market improves."
Credit-default swaps (CDSs) - insurance against economic and political uncertainty - also echo this optimism as Turkey's CDSs trade at levels last seen nearly a year ago leaving Turkey less risky now than at any time in the previous year.
The June 23rd vote in the U.K. regarding the "Brexit," or a British exit from the European Union, continues to rattle European markets. As Turkey's largest trading partner, the health of Europe is very important for Turkey. Continued turmoil in European financial markets will ultimately lead to continued turmoil in European consumer consumption and employment and this will be bad for Turkey. Should Britons vote to remain in the EU, as Prime Minister David Cameron continues to lobby the British electorate to do, then this existential crisis for the EU will be averted. Should London Mayor Boris Johnson and the pro-Brexit crowd be successful, then proceedings for a Brexit will begin and the EU will face its largest obstacle since the near "Grexit," or Greek exit, from the eurozone three years ago.
The Brexit story will dominate headlines in the EU until the referendum, and in the case of Brexit, the euro will suffer despite the fact that the UK is not a member of the common currency zone. As one of the largest members of the EU leaves the union, a potential domino effect may take place, and this is not in the interest of any nation or financial market and definitely not in Turkey's interest.
A strong EU and strong eurozone are critical for Turkish exports, and a Brexit or any other type of exit would hurt Turkey in the medium-term.
