A Torrid Summer

Already present in late spring, financial pressures worsened over the summer months. Market expectations of the ending of the Fed’s ultra-accommodating monetary policy, combined with local political rumours and geopolitical tensions, kindled international investors’ aversion for Turkish risk. Despite a number of jolts, the social climate has been relatively calm since June. And financial pressures, which never reached the levels of 2011, and even less so those of 2008, eased in September. Growth rebounded in H1 2013, but another slowdown seems to be taking shape, and macroeconomic adjustments are still needed.

Under pressure
International investors have become more selective since the announcement last May of the Fed’s upcoming exit from its quantitative easing programme (QE3). This has seriously affected all of Turkey’s financial variables (exchange rate, domestic interest rates, equity prices and the risk premium on external debt). Social unrest in June does not seem to have stigmatised Turkey in particular compared to the other emerging markets. Yet the exacerbation of geopolitical tensions with regard to Syria comprises another risk factor.

As usual, Turkey has been swept up in the turmoil due to its external vulnerability, which regardless of the measure used (private external debt to exports; foreign reserves to short-term external debt or non-resident portfolio investments), is still the highest within the main emerging countries. After eighteen months of euphoria during which nearly USD 33 bn flowed into Turkey’s equity and bond markets, the sudden stop in portfolio investments was confirmed over the summer: between early May and mid-September, net outflows came to USD 4.9 bn (USD 3.6 bn in the bond market and USD 1.3 bn in the equity market).

Interest rate pressures have eased slightly since early September. Between early May and mid-September, the lira (TRY) fell 11% against a euro/dollar basket and the Istanbul stock market plunged 15% (after gaining 70% since early 2012). Spreads on 10-year government external bonds and the premiums on 5-year CDS increased 80bp to 280bp and 200bp, respectively. Even though the rates on 10-year US Treasury bonds increased 100bp over the period to 2.9%, financing conditions in the international markets are still reasonable. At the same time, the yield on 2-year Treasury bonds nearly doubled to 9% under the impact of the downside inertia of inflation expectations and the tightening of monetary policy.

For the moment, the shock wave is not as strong as in summer 2011, in the midst of the eurozone crisis, when the Turkish economy was overheating.

BY Sylvain BELLEFONTAINE

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