Our Opinion: 2014
Turkey : sliding out of control?
The Economist reported this week that there is now ‘a sense that things are sliding out of control,’ in Turkey. The Prime Minister (Recep Erdogan) is refusing to let the Central Bank increase interest rates, although it would help steady the Lira and cap inflation which is now running at more than 8%. His fear is that increased rates will hurt the struggling economy. However, the falling currency is driving up inflation which means that Turkey is loosing international confidence.
Since 2002, when Erdogan came to power, the Turkish economy has grown in size by more than 60%. But now Erdogan appears to be destroying his reputation for restoring political stability. The recent corruption scandal implicated several members of his Government. Rather than acknowledging the judicial investigation, he insisted it was purely the work of a political rival. The FT reported “Foreign investors are becoming unnerved by the dangerous erosion of the rule of law.” Stocks have slid to a two year low and the Turkish Lira is continuing its sharp falls.
The economy depends on foreign money meaning it is vulnerable to the slightest perception of political risk. Turkey’s deficit is worth over 7% of GDP, making the exodus particularly awkward.
The Turkish Lira and stocks had a torrid end to 2013. I expect those falls to continue and this is one emerging market to avoid.