Turkey’s Unorthodox Doctrine Dismissal
Turkish financial assets were whipsawed by a mélange of the European debt and Egyptian political crises and skepticism over monetary policy simultaneously cutting overnight interest rates to discourage incoming capital and raising domestic bank reserve requirements to slow credit growth. The original combination won praise for “macro-prudential” innovation, but alienated investors worried about fiscal and current account deficit readings and likely higher commodity-import inflation heading into the election period. The economic policy departure was mirrored in foreign affairs as the activist “no problems” with neighbor stance viewed as a counterweight to US and Europe ties waded into reconstitution of the governing coalition in Lebanon where internationally-branded terrorist group Hezbollah holds sway. Banking shares slid in particular as domestic bond yields reached 8 percent, and the lira dipped beneath 1.6 to the dollar. Even with the GDP growth clip tapering to 5 percent this year, analysts forecast a 7 percent balance of payments gap, while the budget deficit at 4 percent of GDP was accompanied by a lower monthly primary surplus in recent months despite the ruling AK party’s pledge of pre-poll spending restraint. The business confidence index is clearly in expansion mode with capacity utilization at 75 percent suggesting ample slack. The exchange p/e ratio is at 12 and high-profile cross-border deals endure, including a challenge by the Cukurova conglomerate to a proposed Gulf telecoms merger. However inflation, after meeting the 6.5 percent target at year-end, has since joined the global trend upward, on top of 30 percent consumer lending expansion. The central bank may again switch instruments in its toolkit and revise expectations should the pattern go unchecked, stirring interest and exchange rate swings as campaign rhetoric also moves into overdrive. Prime Minister Erdogan in bidding for a second decade in power attacked the EU in a speech as “comatose,” after he demanded an apology from German chancellor Merkel for questioning his administration’s desire to end the Cyprus dispute. The incident preceded a second summit of Greek and Turkish executives gathering in Thrace to explore joint port and other projects as bilateral relations have opened with Athens’ debt debacle.
South Africahas been another EMEA mainstay falling from favor despite a Fitch rating outlook upgrade on lackluster 3 percent GDP growth and creeping inflation to thwart future benchmark rate cuts. The portfolio enthusiasm that girded the rand with more bond than equity inflows in 2010 to bridge the current account gap will not be repeated, and power firm Eskom instead of tariff increases received state credit guarantees that may swell borrowing. Institutional investors under the latest budget were authorized to raise offshore allocation and may prefer to plug into new outside sources, according to global fund suppliers.
