A raft of metrics show Turkey is becoming increasingly isolated from other emerging markets.
The country has expanded its money supply and spent its foreign-exchange reserves faster than any other major developing economy. None of its major peers have a central-bank policy rate that’s so far below inflation.
The fact that these measures stand out, and that the lira’s slide appears largely homegrown, is prompting investors such as Citigroup Inc. and Fidelity International Ltd. to consider the nation separately from the rest of the asset class.
That may be a consolation for developing-nation investors hoping to avoid a rerun of 2018, when Turkey’s currency crisis helped turn attention to weak spots in other emerging markets, ultimately leading to a selloff from South Africa to Brazil and India.
An analysis of the M1 narrow money growth for 25 emerging markets shows that most Asian and east European governments have contained the increase to single digits this year, with the median at 10.63%. Turkey is expanding at almost seven times that rate. Argentina comes a distant second.
Turkey’s gross-currency reserves have fallen at a much faster pace than the few peers that have also seen a reduction. That’s because state-run lenders have been intervening in the market to support the lira.
Most emerging markets have preserved or increased their cash piles even as the trade slump undermines export revenue.
Turkey’s central bank has boosted funding costs in an effort to support the lira without raising its key interest rate. But when the policy rate is compared with inflation, the nation’s real yield is the lowest among 23 major emerging markets. The central bank is forecast to keep the one-week repo rate unchanged at 8.25% on Thursday.
Given the growing separation between the nation’s financial metrics and those of other emerging markets, money managers have begun to treat Turkey as a separate case.
Paul Greer, London-based money manager at Fidelity International We have concerns around the very weak net foreign-exchange reserves position, elevated loan and credit growth in the country and overly loose monetary policy resulting in unattractive real yields. This has resulted in some concerning current-account balance and inflation trends in Turkey. This is particularly noticeable as balance of payments and price pressure dynamics in most other emerging-market countries have been quite benign this year
Citigroup Inc. analysts Luis Costa, Dumitru Vicol, Sara Felizardo Turkey macro is now diverging significantly from emerging-market majors in two important fronts: inflation profile and current-account balance. We expect Turkey’s GDP growth to rebound by 4.5% year-on-year next year, but current and fiscal accounts are unlikely to improve significantly
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