After the coup...

The failed military coup in Turkey and subsequent government backlash have dominated investors’ concerns over the past week and triggered a sell-off in local financial markets. Policymakers have already taken steps to try to diminish financial stress and offset the likely hit to the economy. At the central bank, the MPC cut interest rates, pledged to provide unlimited liquidity to banks and set out to improve its communications, while the government is pushing through a package of investment incentives. The authorities have stressed that any economic hit will be short-lived. We struggle to share officials’ comparative optimism though. For one thing, efforts to support the economy through looser monetary conditions risk making it more difficult to attract the capital inflows needed to finance the current account deficit. More fundamentally, while economic figureheads in the government have made the right noises, they’re unlikely to fully assuage investors given the ongoing centralisation of political power which threatens to cause the business environment to worsen. Growth prospects in both the near term and medium term appear to be deteriorating.