This week we want to follow a few interesting developments on the other side of the globe and shift our focus to Turkey.
The Turkish currency, the lira, is trading at an all-time low after losing 22 percent of its value in the last 12 months. Some analysts are forecasting a further decline of 5 percent in the next quarter.
Turkey’s economy, which was one of the top-performing emerging markets, contracted 1.8 percent in the third quarter of 2016 for the first time after seven years of continued growth. That compared to a 5.4 percent expansion in the third quarter of 2015.
Turkey is joining other emerging markets that have suffered since the U.S. election, which triggered investors’ fears of rising global instability together with rising interest rates in developed countries. But Turkey’s situation is more complex, which makes it more fragile than other countries.
It is currently facing:
- Political instability after the failed coup of July 2016;
- Terrorist attacks and continued security threats;
- Low levels of central bank reserves with which to defend the lira;
- Substantial foreign exchange-denominated corporate debt;
- The risk of a downgrade by rating agencies.
All these factors lead to an investor confidence crisis.
Turkey’s central bank reduced foreign exchange reserve requirements ratios and lowered local banks’ borrowing limits. But in order to really support the lira it will need to keep raising interest rates.
President Recep Tayyip Erdogan, however, is blaming speculators for the weakening currency and is focused more on Turkey’s growth. He supports low interest rates to jumpstart the economy.
This asymmetry raises market worries and exacerbates investors’ concerns even further.
And investors are not the only ones who are shifting their focus away from Turkey. One of Turkey’s major growth areas and source of significant foreign exchange income is tourism. This sector is suffering due to continued terror threats, which lowers demand for flights on Turkish airlines and has led to a sharp fall in airline fare income.
My View: There is a lot of uncertainty surrounding Turkey’s economy and its currency. We should expect the markets to keep trading at high volatility levels well into this year. Clients with exposure should consider hedging their positions. For those who are looking to diversify their portfolios, there will probably be a lot of opportunities down the road. This is in line with what we’re seeing around the world, where politics and economics are intersecting in ways we haven’t seen for a long time.
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