Our Opinion: 2018

Things are getting ugly in Turkey…

It’s really great to arrive in Turkey today for a break of almost three weeks, with my family. It is one of my favourite countries and I look forward to exploring new areas and, as a visitor, will benefit from the collapsing currency.

The Turkish Lira is falling, in short, because President Erdogan is blaming everyone else rather than taking the action needed to restore the confidence of investors.

Tukey has a basic problem. Autocrats buy into the system of markets and free trade and all the rest of it when times are good. Their economies boom. Their people have jobs and some spare cash and even access to credit.

But being human, they overdo it on the credit side of things. And eventually you get to a point where the economy is vulnerable to relatively minor changes in global markets.

Turkey is too reliant on foreign funds. With the Federal Reserve in the US starting to raise interest rates (for purely domestic reasons), it’s harder for overseas markets – particularly riskier emerging markets – to attract those foreign funds.

The problem is, by the time a turning point comes, those same autocrats have taken all the credit for the golden era. So, they don’t want things to slow down. Because if they do, they fear that they’ll end up with all the blame for the downturn, and the sometimes ugly regime change that goes with that.

So, when things inevitably start to slow down, they refuse to face reality. They don’t want the central bank to put up interest rates. They start to blame “speculators” backed by US dollars, for conspiring against them. And they just make things worse.

Wiser heads may prevail. Erdogan’s son-in-law has been making some of the right noises, and traders everywhere are itching to catch the turning point on the currency, because they know any bounce will be impressive.

But Turkey is already facing a recession, a potential banking crisis, and rampant inflation.

How could this affect wider markets, if at all?

First, there’s economic. Put bluntly, Turkey is a small and not-particularly-important global economy. It accounts for about 1% of the global economy, and it doesn’t do a huge amount of international trade, except with small neighbouring countries. So from that perspective, it doesn’t matter.

Second, there’s the financial markets. The Turkish market itself is again, internationally irrelevant. The UK stock market is 50 times as big as the Turkish one.

Third, there’s the banking system. Some eurozone banks have exposure to Turkey. Spain’s BBVA has a big stake in Turkey’s second-biggest private bank. France and Italy are next, but they don’t have much exposure. The UK has very little.

This is a bit of an issue, but it’s not catastrophic. We know what will happen ultimately, if a Euro-zone bank runs into trouble – it’ll get a backdoor bailout. It’s already happened in Italy. So, if anything, the Euro has probably been somewhat over-sold on this fear of banking exposure.

Fourth, there’s political contagion. This is a little more uncertain. It’s clearly not ideal that a country in such a geopolitically sensitive position is facing an economic crisis and no doubt, a political crisis to go alongside it. Yet that’s probably not something that will overly concern markets.

Finally, there’s sentiment. The more complacent investors are, the more likely they are to be jolted out of that complacency by events that perhaps wouldn’t worry them at other times. That this is probably the biggest concern about Turkey.

We’ve known for a long time that Erdogan was an autocrat and a dictator-in-waiting. The reason it’s coming to a head now is because the global macroeconomic backdrop is becoming less forgiving.

US interest rates are heading higher, and they’re not the only ones. The Dollar is rising and that basically means that global monetary policy is tightening.

As Warren Buffett once put it (in a different context), it’s not until the tide goes out that you see who’s been swimming naked. The tide is starting to go out. So all those little flaws and problems that were covered over are now being revealed.

If Turkey is having an apparent impact on the Euro and on its fellow emerging markets, then it’s down to this. In other words, it’s not really about Turkey – it’s about the stronger Dollar.

17th August 2018