Why are Turkish assets underperforming?
The Turkish Lira hit new lows this week, whereas government bond interest rates were at their highest levels since the global crisis. Weekly statistics released by the Central Bank on Oct. 1 revealed that there were outflows of $1.8 billion and $500 million from bonds and equities until Sept. 23 during the last quarter.
Turkish assets are not alone. According to the Institute of International Finance, emerging market (EM) portfolio outflows during this past quarter were the worst since the global crisis. Consequently, the borrowing costs of EMs have passed 2013 taper tantrum levels, and their equities have been trailing behind developed country counterparts.
However, Turkish assets have been performing even worse. To see why, it is important to note that the negative mood towards EMs is based mainly on growth worries, which could lead to spiraling problems. As the IMF noted in its latest Global Financial Stability Report on Sept. 29, there has been a surge in emerging market corporate debt in the last few years, which could lead to widespread bankruptcies with rising borrowing costs when the Fed begins raising its policy rate.
Likewise, the Turkish PMI manufacturing index, which was released on Oct. 1, fell again in September, signaling a further fall in production. But the future looks even bleaker, as the economy is faced with a confidence crisis: After a consumer confidence index that hit its lowest since the global crisis, real sector confidence fell below the critical 100 threshold in September, according to statistics released on Sept. 28. The broad confidence index, a combination of different indices, is at an all-time low. Business channel BloombergHT’s own confidence index, also released on Oct. 1, plunged in September as well. On the contrary, economic sentiment indicators are not as worrying in most other EMs.
The political landscape, highlighted by upcoming elections and continuing terror attacks, is obviously taking a toll on confidence. Related to the elections, Turkey also has an unsolvable “president” of a problem, and not figuratively speaking. Brazil has one as well, incidentally also knee-deep in corruption. But whereas the risk factor there is the possibility of Dilma Rousseff’s impeachment, investors are worried in Turkey for exactly the opposite reason: That Recep Tayyip Erdoğan can never be impeached. And by the way, the real is one of the few currencies trailing the lira, so politics does really matter.
Moreover, Turkey’s external debt is much higher than that of most other EMs. Statistics released on Sept. 30 revealed that it was $405 billion at the end of the second quarter. Some $277 billion of this debt belonged to the private sector, of which $110 billion was short-term. And it has risen fast: As the IMF has underlined, the change in corporate debt, as percent of GDP, from 2007 to 2014 is the highest after China. Moreover, Moody’s highlighted in a report released on Oct. 1 that Turkish banks’ high reliance on external borrowing is likely to constrain credit growth once such funding dries up, further depressing growth.
But there is one indicator that is really more worrying than all these statistics combined – one which is longer-term than not only financial data, but also macroeconomic indicators; one which may also help explain Turkish assets’ underperformance. I will pick up here on Monday.