Our Opinion: 2015
Clouds gather over Turkey
Some emerging markets are back in favour, with the consensus being that their earnings will grow around 9% over the next year. However, one market that remains out of fashion is Turkey.
Not too long ago, Turkey was an emerging-market success story. But now the world’s 18th-largest economy is suffering. The currency has slumped by around 20% to a record low against the dollar ; foreign investors are leaving in droves ; growing political instability threatens to do further damage to a sputtering economy, and there seems little scope for a turnaround.
Turkey has been drawn into the chaos in neighbouring Syria, with almost 100 people killed in a suicide bombing in Ankara earlier this month. Islamic State is suspected of involvement in the attack. Meanwhile, there has been renewed conflict between the authorities and Turkey’s Kurdish minority. This is a major blow to an already shaky economy. After a decade of strong growth and low inflation in the 2000s, analysts are pencilling in GDP growth of just 3% this year. Inflation is stuck at around 8% due to the tumbling lira and unemployment has risen to 10%.
The central bank looks set to raise interest rates to prop up the lira and squeeze out inflation, but this will dent growth. An index of economic confidence has plunged to a record low.
Over the years, the AKP has become less market-orientated, neglecting reforms, and more dictatorial and interventionist, a shift that culminated in an attack by Erdogan on the central bank governor when he began raising interest rates last year. This behaviour, along with “a perceived weakening of the rule of law… makes it hard to attract foreign investors”, says The Economist.
Unfortunately, this is exactly the wrong time to upset foreign investors. Turkey is unusually vulnerable to an exodus of foreign money owing to its large current- account deficit, worth more than 6% of GDP. An external deficit means that a country is in debt to the rest of the world and needs to borrow from abroad to fund its growth. So it is especially vulnerable to global capital flows and sentiment overseas. The prospect of US interest- rate rises has drained money away from traditionally risky assets, such as emerging markets.
Turkey’s banks have binged on foreign borrowing, and are very dependent on short-term capital inflows to roll over external debt. If foreign funding dries up, a severe credit crunch is likely.
The investment partners we work with are reducing exposure to Turkey in the portfolios they manage for us and our clients. We work with our Turkish clients to ensure their assets are held in the jurisdiction which is most appropriate for their unique requirements.