This past week has been shocking for the Turkish government, and by extension the Turkish lira, as its volatility and weakness increased with intensity as fears of US sanctions bite. President Trump suggested that the US attach tariffs to steel and aluminum products of 25 to 50 percent and even suggested even more intense tariffs. This sent shock waves through the Turkish economy, raising questions about deficits and the government`s spending habits. President Erdogan claims that there are sinister elements and forces that are external and wish to subvert the Turkish economy. I tend to agree with the Turkish president.
The Turkish government has used credit to to stimulate the economy, resulting in a budget. And more recently, by using the budget, so there are twin deficits. Also, there have been waves of loans, some in US dollars, placed on the books – Turkey will find this problematic in the future. And history tells us that once governments fall into a series of mistakes like the Turks have, the policy measures used to address these issues are usually insufficient. Global investors will soon make this clear by their response to current policy solutions. Generally, most global investors, and we saw this by their reactions over the past week, that they feel that Turkey does not have the full support of global institutions and are thus concerned about contagion.
While investors continue to deliver a collective view on the Turkish economy, resulting in the rise in the nation`s borrowing costs, and sending the lira in a spiral of weakness, we at Classiarius are bracing for a series of shocks that may negatively impact the Turkish government. After a record low in the lira, trading to 7.23 against the greenback, all eyes are on the rating agencies as investors take a wait-and-see attitude. Mr Erdogan is has suggested taking action against credit-rating companies for any downgrades in the future.
From August 20th to September 30, there will be several key announcements that could impact Turkey`s economy directly and indirectly. And let`s not forget, that in addition to Turkey, other markets are under pressure, including South Africa, Russia, Brazil and to a lesser extend, China. The MSCI EM Index was down 18.2 percent at one point, from its peak in January. There could be a mild contagion but as for a full-blown crisis, for now the chance of this is remote.