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By Vincent Boland in Ankara
FT
March 9 2006 02:00
It was, perhaps, a question of when rather than if the Turkish
financial markets would start to retreat. Since a mild sell-off in
early January, the stock and bond markets, and the lira, have climbed
to heights that, some analysts say, were unsustainable. New records
for trading highs were regularly being set at the Istanbul stock
exchange.
The correction has now arrived with a vengeance. Since Tuesday,
Turkish stocks have fallen by about 8 per cent, giving up much of the
gains they had achieved in the past few weeks. The lira has also slid
against the euro and the US dollar, and yields on Turkish bonds have
risen by about 25 basis points.
Analysts say the sell-off is primarily attributable to the view that
rising US interest rates are bad news for emerging markets. "This is
very, very externally driven," says Sonal Desai, a senior economist at
Dresdner Kleinwort Wasserstein in Milan. "There is no doubt that if
global conditions turn markedly tight, emerging markets as a class
will be hurt."
Turkey may be particularly vulnerable to this shift. Among the main
emerging markets it has tended to look excessively highly valued.
Foreign investors have flooded into the Turkish markets in the past
two years at an unprecedented rate, lured by an impressive economic
recovery from a profoundly destabilising financial and political
crisis in 2001.
Since then, expectations of Turkey have changed. There are three main
reasons for this: a stable government pursuing wide-ranging reforms;
the momentum provided to the reform agenda, and to the economy more
directly, by the (admittedly long-term) prospect of joining the
European Union; and a robust monetary policy that has tamed inflation
and restored the credibility of the lira in the minds, and pockets, of
the Turkish people.
Turkish asset prices have soared, with the result that "valuations
were starting to look excessive", says Sarah Hewin, a senior economist
at American Express Bank in London. Sevin Ekinci, an economist at
WestLB in Istanbul, adds: "The foreign exchange market was expecting a
correction in the lira, and it appears to have arrived all of a
sudden."
Yet while external factors may be uppermost in investors' minds, there
are also some looming domestic clouds on the horizon that will affect
Turkey's ability to weather any change of sentiment towards emerging
markets. One is what such a shift in sentiment, and a retreat by
investors, might mean for Turkey's current account deficit, which
remains "one of the key vulnerabilities" for the markets, Ms Hewin
says.
A second is parliament's failure so far to pass legislation
overhauling the social security system, which it has promised the
International Monetary Fun d. A third is the likelihood of an imminent
change at the top of the central bank, where the term of Sureyya
Serdengecti, the governor, expires next week.
So far the government has given no signal about whether Mr Serdengecti
will be reappointed or replaced. He is widely respected, and
uncertainty over the government's intentions is starting to nag at
investor sentiment. "People don't expect a negative surprise [at the
central bank]," Ms Desai says. "If there is a negative surprise, the
markets will punish Turkey."
Longer-term issues are also starting to impinge on the domestic
agenda.
There is little doubt that Turkey is slipping increasingly into
election mode, even though the next scheduled election is not until
late 2007. The government is looking tired and divided. Recep Tayyip
Erdogan, the prime minister, appears to be getting more irritable by
the day.
Industrialists are unhappy with monetary policy, complaining that
interest rates are far too high. This is a sensitive issue for the
government, because much of its core support comes from owners of
small enterprises. Although the opposition is weak and has failed to
impress the public, the government's popularity is declining, posing a
dilemma for Mr Erdogan over the timing of the next election.
If a worsening in the domestic environment is accompanied by a shift
in investor sentiment externally, Turkey may be in for a bumpy ride in
the next few months, analysts agree.
FT
March 9 2006 02:00
It was, perhaps, a question of when rather than if the Turkish
financial markets would start to retreat. Since a mild sell-off in
early January, the stock and bond markets, and the lira, have climbed
to heights that, some analysts say, were unsustainable. New records
for trading highs were regularly being set at the Istanbul stock
exchange.
The correction has now arrived with a vengeance. Since Tuesday,
Turkish stocks have fallen by about 8 per cent, giving up much of the
gains they had achieved in the past few weeks. The lira has also slid
against the euro and the US dollar, and yields on Turkish bonds have
risen by about 25 basis points.
Analysts say the sell-off is primarily attributable to the view that
rising US interest rates are bad news for emerging markets. "This is
very, very externally driven," says Sonal Desai, a senior economist at
Dresdner Kleinwort Wasserstein in Milan. "There is no doubt that if
global conditions turn markedly tight, emerging markets as a class
will be hurt."
Turkey may be particularly vulnerable to this shift. Among the main
emerging markets it has tended to look excessively highly valued.
Foreign investors have flooded into the Turkish markets in the past
two years at an unprecedented rate, lured by an impressive economic
recovery from a profoundly destabilising financial and political
crisis in 2001.
Since then, expectations of Turkey have changed. There are three main
reasons for this: a stable government pursuing wide-ranging reforms;
the momentum provided to the reform agenda, and to the economy more
directly, by the (admittedly long-term) prospect of joining the
European Union; and a robust monetary policy that has tamed inflation
and restored the credibility of the lira in the minds, and pockets, of
the Turkish people.
Turkish asset prices have soared, with the result that "valuations
were starting to look excessive", says Sarah Hewin, a senior economist
at American Express Bank in London. Sevin Ekinci, an economist at
WestLB in Istanbul, adds: "The foreign exchange market was expecting a
correction in the lira, and it appears to have arrived all of a
sudden."
Yet while external factors may be uppermost in investors' minds, there
are also some looming domestic clouds on the horizon that will affect
Turkey's ability to weather any change of sentiment towards emerging
markets. One is what such a shift in sentiment, and a retreat by
investors, might mean for Turkey's current account deficit, which
remains "one of the key vulnerabilities" for the markets, Ms Hewin
says.
A second is parliament's failure so far to pass legislation
overhauling the social security system, which it has promised the
International Monetary Fun d. A third is the likelihood of an imminent
change at the top of the central bank, where the term of Sureyya
Serdengecti, the governor, expires next week.
So far the government has given no signal about whether Mr Serdengecti
will be reappointed or replaced. He is widely respected, and
uncertainty over the government's intentions is starting to nag at
investor sentiment. "People don't expect a negative surprise [at the
central bank]," Ms Desai says. "If there is a negative surprise, the
markets will punish Turkey."
Longer-term issues are also starting to impinge on the domestic
agenda.
There is little doubt that Turkey is slipping increasingly into
election mode, even though the next scheduled election is not until
late 2007. The government is looking tired and divided. Recep Tayyip
Erdogan, the prime minister, appears to be getting more irritable by
the day.
Industrialists are unhappy with monetary policy, complaining that
interest rates are far too high. This is a sensitive issue for the
government, because much of its core support comes from owners of
small enterprises. Although the opposition is weak and has failed to
impress the public, the government's popularity is declining, posing a
dilemma for Mr Erdogan over the timing of the next election.
If a worsening in the domestic environment is accompanied by a shift
in investor sentiment externally, Turkey may be in for a bumpy ride in
the next few months, analysts agree.
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