Mar 27 2018

Turkey is the weak link in emerging markets – WSJ

Turkey and its lira currency is the one to watch for investors concerned about problems in emerging markets masked by a world awash with easy money, the Wall Street Journal reported.

The lira has hit record lows against the dollar, down 4.8 percent this year, in a world where the dollar has been weakening. It has also dropped to a record against the euro. In contrast, many other emerging market currencies have risen, improving growth prospects, the newspaper said.

In Turkey, the problem is the risk of an overheating economy. Inflation is over 10 percent and economic growth last year was probably 7 percent, well above potential. The current account deficit is widening again. That has provoked Moody’s to cut Turkish debt to two steps below junk status, warning of external shocks to financing flows that keep the economy afloat.

Turkey has faced these challenges before, but in the past the central bank has only raised rates enough to provide temporary relief, kicking the problems down the road without properly addressing them, the WSJ said. Many international investors are already skeptical about the country, it said.

Should the dollar’s broad decline reverse, Turkey could face a much stiffer test as the U.S. Federal Reserve raises interest rates and after political tensions worsened relations between Turkey the United States and European Union, the WSJ said.