Is the recent calm in the Turkish market merely illusory?

Originally appeared on Bosphorus Consulting on 01 March 2014

After a month of seeing the lira in free-fall, the Turkish economy appears to have stabilized, somewhat. Moreover, with other emerging markets Ukraine and Venezuela in crisis mode, the heat is off Turkey for the time being. However, such apparent calm may be merely illusory.

While the lira’s free-fall against the dollar may have moderated, it has still lost approximately 19% of its value compared with the same time last year, which does not bode particularly well given Turkey’s alarming current account deficit. Morgan Stanley, in a research note published 21 February 2014, writes that while they agree with the Central Bank’s current rate, believe that the country’s ability to deal with inflation and keep its monetary stance tight will still depend on external factors (“CEEMEA Macro Monitor (A Moment of Truce),” 21 February 2014).

The Financial Times reports this week that Turkish consumer confidence is at its lowest for four years (“Turkey’s Erdogan dismisses latest leaked recording as a smear,” 27 February 2014). With unemployment levels increasing by 2.8% in the past month, Timothy Ash, head of emerging markets research at Standard Bank, says markets are now seeing more clearly “the direct influence of the domestic political risks, high policy interest rates and weaker, more volatile foreign exchange rates on the real economy.” (Hürriyet Daily NewsTurkish consumer morale hits four-year low,” 1 March 2014).
Added to this, Reuters reports that non-Turkish companies are beginning to feel the effects of Turkey’s “sagging currency, rising inflation and a growing political power struggle, adding to fears the country may not be the source of future growth that some companies had hoped.” (“Foreign companies in Turkey face squeeze,” 25 February 2014). The article cites a number of large companies, including Vodafone and Ford, whose revenues have dropped in recent months.

While Turkey appears to have stepped back from the brink of a financial meltdown, the effects of the past few months are now showing signs of catching up with both Turkish and non-Turkish companies. Moreover, long-term structural challenges remain and appear actually to have been exacerbated by recent events.

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