The failed coup may smash Turkey's economy but here's why there won't be emerging market contagion

The failed military coup aimed at ousting Turkey's President Recep Tayyip Erdogan will significantly impact the country's economy but there are a whole host of reasons why there won't be knock-on effects for emerging markets elsewhere.

That's according to Melis Metiner, John Lomax, and their team at HSBC. They point out that:

"The attempted coup in Turkey will likely put pressure on the currency, local rates, equities, and economic performance but the restoration of government control at home and supportive monetary conditions abroad may cap the downside risk and limit contagion to the rest of EM [emerging markets]."

Last week an attempted military coup by a faction within the Turkish armed forces calling itself the "Peace at Home Council" was stifled in less than 24-hours, after Turkish president Recep Tayyip Erdogan called on his supporters to take to the streets and repel the uprising.

However, at least 256 people were killed in the clashes, according to Turkey's prime minister, as people took to the streets to stop soldiers trying to overthrow Erdogan. You can read about why Turkish soldiers staged a coup and ultimately failed here.

Meanwhile, Turkish justice minister Bekir Bozdag says "the cleansing is continuing." 3,000 soldiers were detained over the weekend and arrest warrants were issued for more than 2,700 judges and prosecutors.

HSBC analysts say that "contagion from events in Turkey is likely to be limited as the situation appears to be under control and the dovish external backdrop is still supportive for EM."

In other words, although there will be impacts to the local economy, the overseas support and restoration of political stability mean the effects are unlikely to spill over into neighbouring emerging markets.

However, here is what it looks like for the Turkish economy:

Economic growth - Analysts warn that previously predicted 2.9% growth for the economy could be hit because uncertainty surrounding the political climate - even though the coup failed - could really hurt confidence and public spending. If public spending wanes, economic growth is impacted as less money from people's wallets are feeding back into the economy. "We also believe that if there is a sustained increase in Turkey's political risk premium, the country's large external financing requirement could once again become an area of concern."

Fixed income and equities - Stocks are bound to suffer because, as HSBC points out, "previous periods of political stress in Turkey saw sharp losses in the near term, and strong recoveries in the medium term." Meanwhile, curves will flatten because markets have to price in the prediction that there will be monetary easing and potential actions taken by credit agencies.

The currency - The Turkish Lira is going to be weaker in the short term and HSBC says there are "4 channels of vulnerability that could impact the currency" to focus on. These are: "a) portfolio outflows, b) the private sector experiencing difficulty rolling over hard currency debt, c) FX buying by households, and d) a widening in the current account shortfall."

The Lira currently recovering from the steep losses it suffered in the wake of the coup. The US dollar is currently 2.8% lower against the Lira:

HSBC says "we maintain our current year-end forecast of 3.00 for USD-TRY while we wait to get a further sense of how political developments are impacting the macro environment."

Meanwhile, Turkey's deputy prime minister Mehmet Simsek said the government will not intervene to support the lira.