Turkey was once the fastest-growing economy in the G-20, but is now struggling as a result of the global slowdown, Europe’s debt crisis, increasing terror attacks and political uncertainty. Dipti Kapadia explains.
By EMRE PEKER in Istanbul and CAROLYN CUI in New York
Turkish markets soared as investors cheered a parliamentary victory for the president’s party as a sign of stability, the latest catalyst for a broad emerging-market rally.
President Recep Tayyip Erdogan’s long-ruling parliamentary allies—the Justice and Development Party, or AKP—regained the majority in Parliament in Sunday’s early election, which ended months of political uncertainty and stoked a rally despite a deteriorating economic outlook in one of the world’s major emerging markets.
Turkey’s currency, the lira, strengthened by as much as 5.7% to 2.758 per U.S. dollar Monday, its strongest intraday level since July 31. The currency, which hit its weakest level ever against the dollar—3.0579—in late September,rose 3.2% on the day to 2.8239 per dollar in late New York trading.
Turkey’s main BIST-100 stock index rose 5.4%, its largest percentage gain since December 2013. Government-bond prices also jumped.
“The expectations prior to the elections were for sustained political uncertainty, but the outcome implies increased stability. That was reflected in asset prices,” said Alex Wolf, emerging-markets economist at Standard Life Investments, with £250 billion ($386 billion) of assets under management.
Emerging markets came under pressure around midyear as investors became anxious about the economic health of China, exacerbated by the country’s surprise move to devalue its currency. The slowdown in China, the world’s biggest importer of many raw materials, had pummeled commodity prices and weighed on global trade, two factors that put pressure on other developing nations.
Global investors pulled $37 billion from emerging-market stocks and bonds in the third quarter, the biggest outflow since the fourth quarter of 2008, according to the Institute of International Finance, or IIF. During the quarter, emerging-market stocks and bonds posted the steepest losses in many years.
In recent weeks, signs of stabilization in China and in commodity prices, along with the U.S. Federal Reserve’s decision to keep interest rates near zero, helped stem the capital outflows and boost emerging-market assets. In October, the IIF estimated emerging markets had an inflow of $13.9 billion from foreign investors, the first inflow since June.
Turkey fared worse than many of its emerging-market peers during the selloff. In the first eight months of this year, foreign investors pulled a total of $4.9 billion from Turkish markets, more than any other emerging market that the IIF tracks. Turkey’s current-account deficit stood at 5.7% of its gross domestic product in 2014, one of the highest among all emerging countries. Because of its reliance on cheap foreign capital to fund its deficit, the country is regarded as one of the most vulnerable markets once the U.S. begins to raise interest rates.
The election outcome has triggered a reversal of some of the bearish positions.
Defying expectations of another hung parliament, the AKP clinched a fourth term in government with a comfortable majority to govern alone, but fell short of the number of seats needed to put a revised constitution to a referendum that would transfer executive powers from parliament to Mr. Erdogan’s presidency.
“It is probably the best outcome under the circumstances, at least in the near term: While a single-party AKP government will restore political stability, the expected parliamentary setup will make it impossible for President Erdogan to seize executive power,” said Lubomir Mitov, an economist at UniCredit in London. “We expect the lira to rally in the coming days, as will share prices and Turkish bonds.”
Failure among the AKP and opposition parties to strike a partnership after June ballots had triggered political uncertainty and early elections, stoking a market selloff just as Turkey grappled with the fallout from anticipation of a U.S. interest-rate increase.
The AKP swept back to power on a campaign of stability and economic populism as Turkey faced a rapidly deteriorating currency and mounting security threats from Islamic State and Kurdish insurgents following June polls.
While the election results sparked a surge in Turkish markets, many investors say they won’t eliminate the challenges that the country faces, underscoring the persistent issues for many emerging markets, ranging from sluggish global growth and an eventual lifting of U.S. interest rates.
Fitch Ratings warned after Turkey’s elections that despite the results yielding a continued one-party government by the AKP, that Turkey still faces political risks from violence between the state and Kurdish militants, plus a potential push by Mr. Erdogan to consolidate his powers. Moody’s Investors Service said that while the AKP’s victory reduces political uncertainty in the near term, the country still grappled with low growth, high inflation and volatile fund flows.
A supporter of the Justice and Development Party, or AKP, holds a portrait of Turkey's President Recep Tayyip Erdogan as people celebrate outside the AKP headquarters, in Istanbul, Turkey, late on Sunday. ENLARGE
A supporter of the Justice and Development Party, or AKP, holds a portrait of Turkey's President Recep Tayyip Erdogan as people celebrate outside the AKP headquarters, in Istanbul, Turkey, late on Sunday. PHOTO: ASSOCIATED PRESS
Economists expect Turkey’s economic growth to slow in the second half of the year, after it already slumped to an average of 3% annually since 2012 from 5% yearly in the previous decade. Meanwhile, inflation is forecast to jump above 8% in 2015, missing the central bank’s 5% target as the lira depreciation derails efforts to slow price increases despite the benefits from low energy prices.
“Deep-seated problems in the economy had become apparent under the AKP government even before this year’s round of elections started,” said William Jackson of Capital Economics in London. “It remains to be seen whether the party will try to regain its economic policy-making credibility that had slowly eroded over the past few years.”
SOURCE :WSJ.COM
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