Turkey ETF Vulernable to External and Domestic Pressures

ETF Trends

Turkey’s economy remains fragile and vulnerable to both domestic and international shocks. Turkey exchange traded fund investors should monitor the situation closely as any small pressures could push the market over the edge.

The current-account deficit has been a major point of concern in the emerging markets. In Turkey, the deficit is at over 5% of GDP – levels that have instigated a currency crisis in the past, Euromoney reports.

David Lubin, chief EM economist at Citi, argues that the current-account adjustment prospects in Turkey look favorable as credit growth slows and diminishes domestic demand.

Timothy Ash, head of EM research ex-Africa at Standard Bank, points out that the markets are pushing for higher domestic rates in Turkey to quickly clamp down on domestic demand as a way to cut back the current-account deficit.

However, a change in monetary policy could trigger a economic recession in the coming quarters. Last month, the Turkish central bank raised its overnight lending rate to 12% from 7.75% and more than doubled the overnight borrowing rate to 8% to 3.5%.

While the government can help diminish the current-account deficit through direct intervention, the country’s low savings rate, which stands at around the 12% to 13% level, “makes current-account deficits a much longer process to redress,” Patrick Lamaa, FX strategist for UBS, said.

Additionally, the current political crisis gripping Turkey could exacerbate volatility in Turkey. [Turkey ETF Leads EM Sell-Off on New Act in Political Drama]

The iShares MSCI Turkey ETF (TUR) has declined over 25% since the corruption charges rocked Turkish equities in mid-December 2013. [Corruption Charges Ruffle Turkey ETF]

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For more information on developing economies, visit our emerging markets category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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