The potential emerging market bloodbath

Originally appeared on Bosphorus Consulting on 11 November 2014
The dollar is gaining in strength…call it a revival. This situation presents a problem for emerging markets for a number of reasons, and Turkey is among the countries predicted to be affected most. Among the so-called “fragile eight” economies (Argentina, Brazil, China, India, Indonesia, Russia, South Africa, Turkey) expected to be worst hit, Turkey finds itself among the most vulnerable according to Worth Wray writing inBusiness Insider (“The US Dollar Plays The Villain In The Emerging Markets Horror Story”, 27 October, 2014).Emerging markets had been enjoying a long, easy ride thanks to the US Federal Reserve’s quantitative easing programme which it has now officially ended, putting pressure on the ability of companies to raise capital. Turkey has not escaped unscathed, and the problem is compounded by the fact that Turkish companies are carrying a huge amount of debt denominated in foreign currency, including dollars. Any rise in the dollar against the lira automatically increases the size of this debt and the repayments. This unfortunate combination is putting considerable pressure on Turkish businesses. The danger is that this pressure may in turn result in further drops of the lira against the dollar, further exacerbating the problem for Turkish businesses.

This comes against a background of growing disquiet about Turkey’s security situation and a surge of negative press concerning the country. In this context, Turkish businesses will need to redouble efforts to get the right messages across to stakeholders – including the all-important investors and analysts.

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