Global investors will be monitoring Turkey’s unfolding currency crisis amid fears it will spread to other emerging market economies and beyond.
A conference call held by the Turkish Finance Ministry with thousands of investors and economists last Thursday temporarily soothed nerves and reversed the slide in the lira.
But the sell-off resumed on Friday as Turkey’s currency fell 3 per cent amid simmering tensions with the US as a Turkish court rejected a US pastor’s appeal for release.
The Turkish lira has now declined by almost 25 per cent since August 9. Its slide has triggered falls of more than 6 per cent in both the South African rand and Argentinian peso.
Institutional investors say they were left underwhelmed by Finance Minister Albayrak’s Thursday comments,
They were described by Fidelity’s emerging market debt portfolio manager Paul Greer as “backward looking” and “highlighted Turkey’s limited knowledge of the crisis”.
He said Turkey needed to lift interest rates by at least 10 per cent, mend diplomatic relations with the US given the country’s reliance on US dollar funding and overhaul the team managing the country’s economy and finances.
“If Turkey does not deliver on these three areas, it seems reasonable to assume external bond market access will remain shut for Turkey for the foreseeable future.”
Eric Fine of Van Eck’s New York-based emerging market bond fund told The Australian Financial Review that the fund’s view on Turkey was unchanged after the call.
The only positive he could take away from the call was that Turkey promised “to be in regular conversation with the market”.
But the negatives were the lack of detail about their plan, and no express support for higher interest rates. Instead it relied on fiscal consolidation
“The call is over. We had a one-day bounce. Then it was over. You can’t do a conference call every other day,” said Mr Fine, who was once involved in a restructure of Turkish sovereign debt.
While Turkey’s currency crisis has triggered sharp moves in other emerging currencies such as the South African rand, there are concerns that it could weigh on confidence in developed markets.
“The lira’s exponential decline has certainly been contagious regionally, but not yet systemically since the S&P500 is only 2 per cent and US two-year yields are only 6 basis points from their highs,” JPMorgan strategists wrote.
Oxford Economics head of macro Gabriel Sterne said in a note to clients that while the currencies of other emerging economies had sold off, most were in a “good position to survive relatively unscathed”.
“Turkey’s problems are not really symptomatic of wider vulnerabilities in emerging markets and its financial linkages with the outside world are too small, limiting direct contagion,” Mr Sterne said.
“The bigger concerns for other emerging market economies relate to further sustained uncertainty, the rising dollar and tightening global liquidity.”
The Oxford Economics note said that the Argentinian peso and the South African rand had borne the brunt of the sell-off because they were the most vulnerable to a currency crisis.
“The fact that the rand and peso were the hardest-hit currencies suggests that markets are worried about EMs with a high reliance on dollar funding,” the note said.
“Dollar strength adds grit to the wheels of the global financial system by increasing currency mismatches and deteriorating balance sheets.”