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Trump-Erdogan meeting could result in sanctions on Turkey if it turns fiery, analyst says

Key Points
  • The two leaders are due to meet at the ongoing G-20 summit in Osaka, Japan, on Saturday, with Turkey facing acrimony from the U.S. and NATO over its purchase of advanced Russian S-400 missile defense systems, due to be delivered next month.
  • Kim Catechis, head of global emerging markets at Legg Mason affiliate Martin Currie, told CNBC Thursday that Ankara and Washington are on a collision course not only over the missiles, but also Turkey's "support for Iran, Russia and Qatar versus the U.S.-supported Saudi Arabia and Israel."

A meeting between President Donald Trump and Turkish President Recep Tayyip Erdogan will likely result in sanctions, with the two nations on a "collision course" over geopolitical issues, an emerging markets analyst told CNBC.

The two leaders are due to meet at the ongoing G-20 summit in Osaka, Japan, on Saturday, with Turkey facing acrimony from the U.S. and NATO over its purchase of advanced Russian S-400 missile defense systems, due to be delivered next month.

Erdogan told Japanese business newspaper Nikkei on Thursday that he believes the meeting with Trump will resolve the S-400 issue and strengthen bilateral relations.

However, Kim Catechis, head of global emerging markets at Legg Mason affiliate Martin Currie, told CNBC Thursday that Ankara and Washington are on a collision course not only over the missiles, but also Turkey's "support for Iran, Russia and Qatar versus the U.S.-supported Saudi Arabia and Israel."

"We expect this meeting to be fiery and believe it will result in sanctions, knocking investor confidence even further," Catechis said.

He suggested the sanctions could take the form of the U.S. cutting Turkey out of the F35 fighter program, which complicates matters due to Turkey's involvement in the manufacturing of the jet.

"There are a couple of critical components for which Turkish companies are sole suppliers," Catechis explained.

"Clearly, the impact on Turkey will be the loss of certain manufacturing jobs, as well as revenues."

He added that there could also be sanctions on the export of Turkish goods, though exactly which ones would depend on "the whim of (the U.S.) Commerce Department and the White House."

S-400 Triumf surface-to-air missile launchers are seen during the Victory Day military parade in Moscow, Russia on May 09, 2018.
 Sefa Karacan | Anadolu Agency | Getty Images

Domestic woes

While the negative impact of such actions would be indirect for equity investors, since most defense-related companies' stocks are not quoted, Catechis suggested banks which have extended credit "may have to refinance and this erodes the quality of their loan book."

He pointed toward Moody's recently downgrading 18 Turkish banks, shortly after a country downgrade.

Erdogan arrived at the G-20 meeting following a humiliating election defeat for his party in rerun elections in Istanbul, while the country recently entered its first recession in a decade and faces fraying relationships with NATO and the European Union.

Sanctions would compound the Turkish government's headaches with the Moody's downgrade still fresh, and corporate issuers will inevitably be affected, Catechis predicted.

"So ostensibly bond and equity investors may decide to reduce exposure, especially as the country is under severe balance of payments stress and this is another set of problems to worry about," he said.