Aug 12 2019

Turkey may face market backlash, Berenberg senior economist says

Investors in emerging markets could target Turkey should its monetary and fiscal policy deteriorate further, said Kallum Pickering, senior economist at Swiss bank Berenberg.

It is a very risky time for developing markets in general because they typically do well when global demand is strong and investors are risk-on, Pickering told Bloomberg Television on Monday.

“Turkey is a very uncertain place to look at as an investor, as an economist,” Pickering said. “It’s ideally positioned – it’s between big Asia and big Europe.

“But what you have is an economy which is slowly but surely undoing a lot of the reforms of the last 30 years which led to it being a good place to invest,” he said.

Turkish President Recep Tayyip Erdoğan sacked the chief of the central bank last month and his replacement has slashed interest rates saying there is significant room for lower borrowing costs. Meanwhile, the government has gone on a spending splurge, widening the 12-month budget deficit to about 4 percent of GDP. It has promised fiscal discipline in the second half of the year.

“I think probably Turkey is not quite at the bottom of the pack and it benefits a bit from that,” Pickering said of recent gains for the lira. “But if things got really weird with the central bank - say interest rates got cut a lot - or if we saw with Erdoğan say a big fiscal stimulus I think markets could turn on Turkey pretty quickly.”

Pickering warned the political leaders of emerging markets around the world to tread carefully.

“If just one or two emerging markets start to look a little bit iffy, expect markets to treat them very, very severely,” he said.

The Turkish lira has bucked the negative trend in emerging market currencies over the past month. Last week, it reached a four-month high against the dollar even after the central bank cut interest rates by 425 basis points to 19.75 percent. On Monday, the lira dropped 1 percent to 5.54 per dollar.