Turkey’s financial markets remained relatively calm in the face of bribery confessions and other allegations targeting President Recep Tayyip Erdogan.

The sanctions-busting case in the United States involving prominent Turkish suspects is being followed daily, like a nail-biting TV series, by many at home and abroad. A bribery scandal, which Turkey had covered up in December 2013, is back in the open, this time in New York and through the confessions of Turkish-Iranian gold trader Reza Zarrab, who says he paid kickbacks to Turkish politicians and bankers while he ran an elaborate scheme to evade US sanctions on Iran.

Last week, Zarrab’s confessions appeared to also implicate President Recep Tayyip Erdogan, who was prime minister at the time. This coincided with the main opposition Republican People’s Party exposing alleged offshore accounts of people from Erdogan’s inner circle, involving sums that are hard to explain.

Yet neither Zarrab’s testimony nor the offshore controversy seemed to unsettle the financial markets in Turkey. This was true also for the latest jump in inflation, announced as 12.98% on Dec. 4. Many now wonder why the markets have remained unmoved in the face of a string of bad news.

In early November, the Turkish lira had tumbled badly, prompting the Central Bank of Turkey to intervene to rein in the dollar, which had hit almost 4 lira. According to Central Bank data, foreign investors pulled out more than $1 billion in short-term investments from Turkey in the second week of November, but in the next two weeks, there was an inflow of $450 million, two-thirds of which went to cheapened stock shares.

While the flight of foreign investors stopped in the second half of November, the price of the dollar remained at about 3.95 lira under the impact of continuing demand by companies with foreign exchange deficit and individual investors. Also, a covert rate hike of half a point by the Central Bank, coupled with signals that it could go for more meaningful hikes, slowed down the greenback to some extent.

Many had expected that Zarrab’s confessions and the offshore documents could trigger an economic tremor along with the political one, but the markets have a different way of reading things that correspond little with what one sees through the prism of accountability and ethics. As everybody knows, profit is the primary concern of investors or “the markets.” Corruption and unlawful practices are a concern to the extent they affect their risk barometer.

The allegations, names and events coming up at the sanctions-busting trial in New York appear to have had little impact on pricing at the markets — for now. Things could change with new revelations and signals. But bribery, corruption and even high inflation are not really “news” for the markets. All these have already been priced in. Speculation that Zarrab would plead guilty and cooperate with prosecutors was abuzz weeks before the trial kicked off on Nov. 27.

All in all, the yield on the lira-denominated, 10-year treasury bond fell by 85 basis points during the first week of the trial, indicating that investors were buying bonds. The price of the dollar, which hit about 3.98 lira Nov. 28, closed the week at 3.92 lira, while Turkey’s credit default swaps, a risk indicator, fell below 200 points.

In sum, the markets have already priced in the turbulence from the Zarrab and offshore controversies, and only a new turbulence could lead to repricing.

The markets seem unperturbed by the rising inflation as well. As the Central Bank’s latest inflation report confirms, both consumer and producer inflation in Turkey is fueled by the increase in the price of the dollar — 13% over the past two months — and the rising prices of oil and other commodities on global markets where the country is an importer.

Consumer inflation rose almost 13% year-on-year in November, its highest level in 14 years. The surge was led by transport prices, which increased about 19% under the impact of mounting oil costs. Year-on-year inflation reached 15.8% in food and nonalcoholic beverages, 12.9% in household goods and 12.4% in health care.

The increase in producer prices is even scarier — 17.3% year-on-year in November. The 23% inflation in intermediate goods is a particularly strong omen of further repercussions on consumer prices. Of note, producer prices shot up 17.3% during a period in which electricity and gas prices saw an annual drop of 1.2%. Ankara is now gearing up to hike electricity and gas prices as well. In the meantime, wages are melting against the peaking inflation, and popular discontent is bound to grow.

In November, all confidence indices deteriorated, which came as no surprise. The consumer confidence index fell to 65.2, its lowest level this year, and lower even than in July 2016, when the country went through a coup attempt.

Yet despite this gloomy economic outlook, coupled with Zarrab’s bribery confessions and the offshore money controversy, the Turkish lira has been gaining ground since last week. What to make of such market behavior? According to conspiracy theories making rounds through the grapevine, the government is manipulating the stock exchange and swaying the markets via shell companies that buy stock shares and sovereign bonds. Yet a more plausible explanation is that the markets expect the Central Bank to hike rates at its Dec. 14 meeting, pressed by the rising inflation. So this is now being bought in advance, with many selling foreign exchange while the prices are still high, which in itself is bringing the prices down.

What if the prices fall to a level that the Central Bank deems satisfactory when it convenes on Dec. 14? Why should it go for a rate hike then? The bank could well decide against a hike, especially if the third-quarter growth rate, to be released Dec. 12, comes in an impressive range of between 7-8% as expected. The markets this time could grow disappointed over the lack of a hike and turn to foreign exchange again, sparking a new dollar rally in the second half of December.


Written by Mustafa Sönmez