Turkey’s currency woes and escalating trade tension with the US are not about to plunge emerging markets into a systemic crisis, despite a strengthening US dollar, according to asset managers.
The Turkish lira has lost more than a third of its value against the dollar so far this year, exacerbated by president Donald Trump doubling tariffs on Turkish steel and aluminium imports as part of an ongoing spat over the detention of an American pastor in Turkey. It continued to weaken on Tuesday hitting 6.2000 against the dollar. At the start of the year it was hovering around 3.800.
Isolated incident
But according to Seema Shah, global investment strategist at Principal Global Investors (pictured), Turkey’s problems are isolated relative to its emerging market (EM) peers and are not enough to trigger a systemic crisis across EMs.
Shah said a sharp increase in credit growth and fiscal spending has resulted in a significant widening of Turkey’s current account deficit, while the country is also heavily dependent on volatile short-term foreign capital. Meanwhile, its central bank has failed to respond to rising inflation, which is now running more than 10% above its target.
She said: “It stands out as the only large emerging market country where the private sector is running a large savings deficit and is therefore highly dependent on capital inflows. In fact, Turkey is also one of very few emerging economies where key macro stability indicators are stretched.”
By contrast, Shah said many other EM economies now run current account surpluses, or small deficits, and their ratios of foreign exchange reserves to short-term external debt tend to be reasonably high.
“As a result, few of them are susceptible to balance of payment crises and most can deal with capital outflows,” she added. “It would now take a very severe withdrawal of foreign capital to spark a widespread emerging market crisis.”
Cracks appearing
Hermes Investment Management, meanwhile, noted cracks in Turkey’s economy were starting to appear before the US trade tiff took hold.
Portfolio manager at the firm Andrey Kuznetsov also highlighted Turkey’s gaping current account deficit and high dependence on short-term foreign-currency borrowing, as well as ineffective monetary policy and concerns about central bank independence.
He said at 137% of GDP, Turkey’s gross debt balance is lower than the EM average of 162%, but its build-up of FX debt since the financial crisis, amounting to 70% of GDP, is almost double the EM average, making it vulnerable to currency shocks.
“These problems have weighed negative investor sentiment, which has been amplified by the imposition of sanctions and tariffs by the US in recent weeks,” Kuznetsov said.
Trouble brings opportunities
However, Kuznetsov said increasing bond yields and the widening of sovereign and corporate credit spreads since the start of August to near-2008 levels has brought robust companies into focus, such as exporters and well-capitalised, domestically-focused businesses.
He highlighted Turk Telecom and Akbank, Turkey’s second-largest private bank, as examples of companies with strong profits that are prepared to conserve cash.
