Wednesday, May 25, 2011

Crisis? What Crisis?

Reuters (via Today's Zaman) has just put out a good piece tracking some of the concerns economists have about the financial picture in Turkey. From the article:
Turkey's yawning balance of payments deficit and an exodus of foreign investors suggest its unorthodox monetary policy experiment may have gone too far, threatening to make Ankara a new flashpoint for risk in global emerging markets.

The country's monthly foreign funding shortfall is running at almost $10 billion, latest data shows -- a tough position to be in when confidence in developing markets is shaky and Western powers are preparing to wind down easy-money policies.

Financing such a deficit in recent years hasn't been difficult, with Turkey's stock and bond markets pumped up by huge foreign portfolio flows, its 2001 financial crash a distant memory.

But that picture could be changing.

A Bank of America/Merrill Lynch poll last week showed equity fund managers are underweight in Turkey for the first time in more than three years. A separate JPMorgan survey showed foreigners cut Turkish debt and currency exposure in May and went significantly underweight on its bonds.

Non-residents had also pulled $325 million out of Turkish stocks by mid-May this year, central bank data shows.

"There are very few countries in the world that run such a large current account deficit or are as vulnerable as Turkey to the withdrawal of capital from emerging markets," said Julian Thompson, head of emerging markets at Axa Investment Managers.

"It's sufficiently worrying to have next to no exposure there," added Thompson, who now has less than 1 percent of the money he manages in Turkish stocks, versus 5 percent last year.
The full article can be found here.

The article reflects the sentiments of several analysts in Turkey I have spoken with who are concerned that Turkey might again be heading towards the unpleasant part of a boom-bust cycle and that current economic policies are being used to boost the government's chances at reelection, rather than to put the brakes on what might be an "overheating" economy.

Meanwhile, on the same pages of the government-friendly Today's Zaman, columnist Ibrahim Ozturk offers a different picture. "Turkey's 'overheating' problem is being excessively abused in an irresponsible manner by some experts in the foreign as well as domestic media," he writes in today's paper. "This perspective has already been turned into a campaign against Turkey," he adds, saying that he believes additional measures will introduced "after the election" to get the economic picture back in order. (Full column here.)

For those interested in drilling down into the data on this a bit more, an analysis piece issued last month by Roubini Global Economics has lots of figures and charts that look at the role external funding is playing in driving the Turkish economy. The piece (found here) concludes with this:
In RGE’s view, the financing of Turkey’s large and growing CAD with short-term and historically more volatile capital inflows is a major risk factor attached to Turkey’s impressive economic recovery.

Whether the recent surge in capital inflows reverses and proves destabilizing is an open question. Turkey’s rapid recovery from the 2008-09 slump has proved the economy is more resilient than in the past, and capital inflows may enhance its long-term growth prospects. On the other hand, Turkey’s own history, and that of other EMs, shows that capital flows can rapidly reverse, and suggests the need for caution.
[UPDATE - A short report by Christian Keller, a very good Turkey analyst at Barclays, arrived in my mailbox soon after I posted this. Looking at recent activities and statements by the Central Bank of Turkey (CBT), Keller says, ".....we fail to follow the CBT’s surprisingly benign and, in our view, somewhat selective interpretation of recent data." His report (quite technical, be warned) can be found here.]

[UPDATE II - A bit more on this story from the Financial Times' "Beyond BRICS" blog, here.]

1 comment:

Mitch said...

Several months later, we can see that the Turkish lira lost 16% against the dollar in the past 3 quarters and has been one of the worst-performing emerging-market currencies this year. This trend has already started to hit bottom lines and companies are planning to hedge against losses.

There are two leading indicators that are driving the lira’s underperformance. First, the country’s rising current account deficit is pressuring Central Bank reserves and the exchange rate. Second, the sovereign debt crisis in Europe is driving investors away from emerging market currencies and toward the dollar, further weakening the lira.