May 09 2018

Turkey risks classic emerging-market crisis, top investor says

Turkey is a candidate for an emerging market crisis, said Paul McNamara, who oversees about $11 billion in emerging-market assets at Switzerland's GAM Investments.

Responding to questions on Twitter from Mark Bentley, Bloomberg's former Turkey bureau chief and an Ahval contributor, McNamara said he stood by an article he wrote in the Financial Times in January last year that predicted the possible meltdown.

Turkey’s lira currency has slumped more than 10 percent against the dollar this year to a record low due to concerns that government stimulus and central bank inaction is leading to overheating and may prompt a hard landing for the nation’s economy. Bond yields have surged to a record high.

In his commentary for the FT, McNamara had raised several concerns, including a government crackdown on its political opponents, a mismatch between the foreign exchange assets and liabilities of Turkish companies and the country’s growing current account deficit.

On Wednesday, McNamara said Turkey could avoid a crisis by “a successfully managed economic slowdown that doesn’t blow up the banks. They all but did it in ‘16 but then went chasing growth.”

He said such an achievement would be more difficult today, given the global backdrop.

“It’s much harder this time with oil up there.”

Turkey’s current account deficit has widened sharply over the past year to almost 6 percent of economic output and companies' foreign debts now stand at more than $220 billion, exceeding 25 percent of economic output. Turkey imports nearly all the oil it consumes, meaning its trade balance, the main component of the current account, is extremely sensitive to price fluctuations.

Oil rose to $77 a barrel on Wednesday, its highest since 2014, after U.S. President Donald Trump pulled Washington out of an agreement on Iran’s nuclear programme.

Standard & Poor’s and Moody’s have both lowered Turkey’s debt rating further into junk territory over recent weeks, citing the current account and economic policy. Economic growth exceeded more than 7 percent in the fourth quarter, the highest in the group of G-20 industrialised nations, and some economists predict a similar performance for the second quarter.

The International Monetary Fund, which sponsored Turkish economic programmes until 2008, also warned last week that Turkey needs to take action to tighten monetary policy. President Recep Tayyip Erdoğan’s government has discarded recommendations by the IMF saying its approach is old-fashioned and hurts Turkey’s economy.

Meanwhile, a crackdown by Erdoğan on his opponents continues and a state of emergency, imposed following an attempted military coup in 2016, remains in place.

The United Nations warned on Wednesday that Turkey must lift emergency rule in order to give credibility to presidential and parliamentary elections, brought forward by Erdoğan to June from November next year.