Turkey Financial markets: Key decision Coming Up
In my last post (June 2nd), I wrote about the effect that US financial policies have on emerging markets in general and Turkey in particular. At that stage I called for a sharp weakening of the Turkish Lira and said that I would not be surprised to see the TL at 2.97 to the pound.
This morning the rate hit 2.96.
In fact all the financial markets in Turkey have fallen sharply in the last two weeks, pretty much in line with my expectations. This has been a perfect storm of longer term trends and the uncertainty created by the recent protests. The question is, where do the markets go from here?
I want to reassure readers that I think the worst of the damage has been done. Turkish financial markets had a strong run up to end April and were in fact all a little overpriced. This had been helped by the upgrades from Moodys, Fitch and S&P, the three international credit rating agencies. Equities were too expensive, interest rates had come down too far too fast and the TL was overvalued. The recent sharp falls have made these valuations more realistic.
Yes there are risks to the downside but these are now much reduced. However there is one huge tipping point. How will the ruling AKP party handle the most delicate issue in its 11 year rule? How will it handle the nationwide anti – government protests?
These protests, if prolonged will affect Turkey’s credit rating. Why is this? Because Turkey relies so heavily on tourism and capital inflows. In fact the Turkish economy is built around its service sector which makes up 63% of what it produces (GDP).
Turkey is the sixth most popular destination in the world, having attracted 31 million tourists in 2011. So far this industry has only taken a small hit but June is the high season for tourists. Hotels in Istanbul are relatively empty and the related support services are all suffering too.
Easy come, easy go. Hot money, or speculative capital flows, triggered by the U.S. Federal Reserve’s ultra-loose monetary policy are sloshing around the world and Turkey had had its fair share.
In 2011 while most Western economies were feeling the effects of the financial crisis, Turkey’s growth rate was 8.5%. Growth declined sharply last year to 2.5% as the global economy stalled, but the IMF expected the situation to improve “barring new external shocks”. But much of the growth in the past decade has depended on external debt, which, at a moment of crisis can leave a country dangerously exposed to market volatility and the whims of investors.
This is essential for capital coming in and other foreign investments. Foreign companies were lured by the perceived political stability under Mr Erdogan’s decade-long rule: Microsoft, Coca-Cola, McKinsey, Boston Consulting Group and clinical research groups set up regional headquarters in Istanbul. Even the US drugs company Pfizer last month announced it was moving its European Union headquarters from Brussels to Istanbul.
So which way will Mr Erdogan jump this month?