The Daily Update - Turkey Still in the Oven as Lira Decline Abates

Intervention reverses lira decline for now, but wider market contagion point to likely further deterioration.

In August alone the Turkish lira depreciated from 5 against the dollar to above 7 earlier this week (it’s always exciting when you can talk about European FX moves in integers) but has today retraced somewhat, dipping below 6 momentarily whilst remaining choppy. The pullback occurred as Ankara imposed restrictions on short selling which had a greater net positive effect over the enacting of higher tariffs on US cars, cigarettes and alcohol.

But the sea of red in European and Asian equity indexes today points to continued pessimism as markets recognise many familiar signs of an emerging market failure. A reminder that Turkey is a low 2-star rating according to our Net Foreign Asset Analysis meaning it has net foreign debts approaching 100% of GDP which are deemed unsustainable – particularly in the face of investor pessimism.

Gross external debt currently stands around $467billion, partly on the back of foreign debt fuelled speculative developments and profligate infrastructure projects. Now net inflows of FDI have fallen to around $10billion –half the levels seen back in 2006-08 – and the lira depreciation is causing hard-currency repayments to balloon in domestic terms. With $3bn in bonds maturing this October and around $100bn due in the coming year across its dollar and euro government debt, any prolonging of the current slowdown and depreciation raises serious concerns about its ability to pay without some of the reprieves it had through the banking crisis of 2001.

Turkey’s local currency sovereign curve has been inverted since the start of the year and has seen a 10% level shift from 14-12% (based from 3m to 10yr) to 24%-22% - half of which has come in the last month. Basing a country’s ability to pay on the assumption that currency and borrowing rates are stable is clearly a dumb and simplistic premise; and yet this is all too often what many investors and even rating agencies do. Shifts in both of these often, as in this instance, can seem fairly stable and attractive right up until the point where they aren’t. And sometimes all it takes is a fairly standard threat of tariffs from Trump to burst unfounded illusions of optimism.

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