On 13 August, AMP Capital chief economist Shane Oliver told InvestorDaily that Turkey’s tumbling currency likely meant concerns about investing in emerging markets would linger for a while yet.
But a US-based investment strategist and CBA’s currency strategist have argued against the idea that Turkey’s issues were sign of deteriorating emerging markets.
In a post on the website of US-based Principal Global Investors, global investment strategist Seema Shah questioned investor fears about Turkey, describing its problems as “mainly stem[ming] from its unhealthy domestic imbalances”.
“Rapid economic growth, fueled by a sharp increase in credit growth and fiscal spending, has resulted in a significant widening of Turkey’s current account deficit, while the country is also heavily dependent on volatile short-term foreign capital.
“Adding to this unappetising mix is a central bank that’s been tainted by doubts about its independence and credibility because policy rates have failed to respond to rising inflation, now running more than 10 per cent above the central bank’s target,” Ms Shah wrote.
US President Donald Trump’s imposition of tariffs on Turkish goods also served as further “fuel to the flames”.
These “idiosyncratic” issues were enough to cause sharp declines in both the Turkish lira as well as investor confidence, Ms Shah noted.
“Coupled with an increasingly challenging external environment involving tightening liquidity and financial conditions, Turkey is facing conditions that are typical for an emerging market crisis.
“But are investors right to fear that the recent strengthening in the US dollar, shrinking Federal Reserve balance sheet, and increasing trade tensions may trigger a systemic emerging market crisis? I would argue no,” Ms Shah said.
Where Turkey’s domestic economic problems had caused it to be “particularly vulnerable to the current challenges facing the global economy,” several other emerging market economies did not share the same issues.
“In marked contrast to Turkey … many emerging economies now run current account surpluses, or small deficits, and their ratios of foreign exchange reserves to short-term external debt tend to be reasonably high.
“As a result, few of them are susceptible to balance of payment crises and most can deal with capital outflows. It would now take a very severe withdrawal of foreign capital to spark a widespread emerging market crisis,” Ms Shah argued.
Don’t lump EM economies into one basket: CBA
Speaking to InvestorDaily, Commonwealth Bank of Australia currency strategist and economist Joseph Capurso noted that there were a “handful of economies with big problems” – such as Argentina as well as Turkey.
“But the problems there are really specific to their economy,” Mr Capurso.
The common elements that these countries shared were high levels of foreign debt, high inflation, and current account deficit.
“Those three problems get worse if the US dollar is rising and the US interest rates are rising,” Mr Capurso added.
But he pointed out that most emerging market economies were in “reasonable shape,” especially in Asia-Pacific.
“When looking at emerging market economies, or any economies for that matter, you need to look at the specifics of each economy.
“You can’t just sort of lump them into one basket, because they’re just different. Simple as that.”
Mr Capurso indicated that this did not mean Turkey’s problems were not serious.
“But I don’t think it means that you need to be concerned about all emerging markets.”
