Analysts at ABN AMRO suggest that a recession is on the horizon for Turkey, but the depth of the recession depends on the measures taken and spill-over to other emerging markets is expected to be limited.
“The lira down 41% year-to-date
USD/TRY rose above 7.2 last Friday, at its peak. Rising tensions between the US and Turkey added fuel to the fire, while measures to halt the fall were seen as insufficient. Since then the lira has recovered somewhat, helped by the announcement this morning that FX swaps will be limited to 25% of banks’ equity (previously 50%). This will limit the ability of locals to do FX swaps. USD/TRY is now back to the low 6’s at the time of writing. The fall in the lira will result in a significant rise in the already high inflation rate (15.9% in July) in the coming months, and a sharp fall in purchasing power.”
“Difficult to find alternative financing
The measures taken by the government and central bank so far are not sufficient to turn the tide. President Erdogan seems uninclined to allow the central bank to raise interest rates, and even less so to ask the IMF for support.”
“With or without interest rate hike, a recession seems unavoidable
According to a recent publication of the IIF, funding of the external financing needs (estimated at around USD 200 bn, or around 25% of GDP) is still available. The rollover rate of external debt stood at some 110% in Q2, but the cost of funding is rising. In order to avoid an acute balance of payments problem, substantially higher interest rates and for example an agreement with the IMF are probably inevitable. This would probably trigger a recovery of the lira towards 5.5 versus the US dollar. Higher interest rates, however, would lead to a sharp slowdown in lending and most likely a contraction of the economy next year.”
“Spillover to other Emerging markets will be limited
At the start of the week, several other emerging markets, such as for example South Africa, Indonesia, Russia, Argentina and Brazil saw their currency weaken. Furthermore country spreads rose, while stock markets across the world were also hit.”
“Still, there are plenty other risks remaining for emerging markets
In our base scenario, global conditions remain supportive for EMs, financial conditions accommodative, and contagion from an unfolding crisis in Turkey limited. There are, however, several factors which could cloud this picture. An escalation of trade tensions is for example an important risk, as is a sharp slowdown in China and a further sharp weakening of the Chinese yuan. Either would hurt trade and create downward pressure on commodity prices (particularly metals) and emerging market currencies, as well as weighing on the growth of many advanced and emerging economies. Monetary tightening in the US and a stronger US dollar are risks as well. This could hurt investor appetite in broader financial markets, and would affect capital flows to all emerging markets negatively.”
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility.