Slowing growth and out-of-control inflation, allied to stubbornly high twin deficits explain why Turkey is more starkly vulnerable to higher US interest rates and a more volatile world than any other major emerging market, experts have warned.
Lucio Mauro Vinhas de Souza, sovereign chief economist at Moody’s Investors Service, told Emerging Markets that Turkey “lacked [key] buffers against external shocks due to its high deficits and reliance on external funding.
“Turkey’s vulnerability has not changed at all, and so we see it as being the most vulnerable [major fast-growing economy] to higher rates over the coming 12 months.”
A year ago, following the announcement by the US Federal Reserve that it was preparing to taper its quantitative easing programme, the country was clumped together with four other indebted nations deemed overly dependent on foreign investment.
Yet while the others on that list have worked hard to trim their deficits, or push ahead with hard-headed privatisation programmes, Turkey has stood still.
Capital Economics warned last month that while a handful of emerging markets, notably in Asia, had taken steps to reduce their external vulnerabilities, Turkey had “made little progress”, and could find itself “back in the firing line as we move toward a first Fed rate hike” in 2015.
It said Turkey was “the most vulnerable emerging market of all”, having seen “little improvement in its external position”.
INFLATION THREAT
Lower growth and inflation have not helped. Turkish deputy prime minister Ali Babacan said yesterday that inflation, currently running at nearly twice the rate of the official target, was the nation’s biggest economic challenge.
Inflation is set to accelerate to 9.4% by the end of the year, compared to the government’s 5% target. Growth is also slackening, with gross domestic product expanding by an annualised rate of 2.1% in the second quarter.
Other critics believe the country’s inability to balance its budget is a far more pressing concern. Peter Attard Montalto, chief emerging market economist at Nomura, said the current account deficit was “clearly the country’s chief vulnerability.
“There has been a huge build-up of external leverage by domestic corporates, who hold far too much externally-sourced debt. That has created a neat feedback loop, where risks and fears that surround the country’s weak currency feed into lower investments. There is a much more negative mood surrounding Turkish inward foreign direct investment than I have seen in years.”
Even good news is viewed with suspicion. On Monday, Babacan predicted the current account deficit would fall to $46bn in 2014 and remain at the same level in 2015, against $65bn in 2013.