Political rumbling rattles investors

Rising political tension in Turkey over wiretapping scandals in the judiciary is “becoming significant enough to reach something of a breaking/turning point,” an analyst warned Thursday.

The analyst advised investors that it may be time to “lighten up exposure” to Turkish assets.

In a note to investors, Timothy Ash, an emerging-markets economist at the Royal Bank of Scotland in London, voiced concern about the “furor” over the ongoing Ergenekon trial and accusations of government wiretapping of members of the judiciary. Ash also noted the recent flare-up of tensions over Onur Öymen, the deputy leader of the Republican People’s Party, or CHP, and his controversial statements on the bloody military operations in the southeastern city of Tunceli from 1937 to 1938.

In addition, Ash noted, the possibility of Belgian Prime Minister Herman Van Rompuy becoming president of the European Council would hamper Turkey’s path toward European Union membership.

“The Russian economy is a stronger bet for investors than Turkey,” Ash said. “Russia’s credit matrix still stacks up much better than Turkey’s,” despite the fact that Russia is regarded as having been hit harder by the global downturn, the analyst added.

Many foreign investors in Turkey pulled out after the threatened judicial closure case against the governing Justice and Development Party, or AKP, in 2007 and 2008. Given the bankruptcy of Lehman Brothers, Ash said, they “never really got back in.”

The Royal Bank analyst also pointed to balance-of-payments data, which says that only $2 billion to $3 billion in portfolio inflows have came into Turkey so far this year, compared to more than $9 billion for South Africa.

“Turkish assets continue to underperform, with the Turkish Lira weakening... The ISE-100’s losing streak this week continues, falling again [Thursday],” Ash said. “Perhaps domestic politics are beginning to weigh herein.”