Since we originally published this post, troubles in Turkey’s capital market have turned into a financial crisis that has started to ripple across emerging markets, even though the country’s problems are largely home-grown. Developing world economic fundamentals are much stronger nowadays, as U.S. Federal Reserve Chairman Jerome Powell pointed out a few months ago, and should be able to handle higher U.S. rates and a stronger dollar. Nonetheless, the market has started to zero in on Turkey’s turmoil. Over the last three weeks, the MSCI Turkey Index cratered another 32%, Turkey’s 10-year government bond yield soared nearly five more percentage points to 22.69%, and the lira lost another 31% of its value against the dollar.
On August 13, President Recep Erdogan said Turkey was “under siege” by the “bullies of the global system,” apparently referring to the U.S. Yet the analysis below better explains the forces buffeting Turkey. Its relevance has increased following Erdogan’s declaration that neither higher domestic benchmark interest rates nor a bailout from abroad are in the cards.
- August 14, 2018