A combination of domestic political and policy uncertainty alongside a diplomatic dispute with the US has contributed the latest sell-off in Turkish assets:
Source: Macrobond, GSAM, http://www.tcmb.gov.tr. As of July 2018. Based on annual headline CPI inflation minus central bank target.
Source: Macrobond. As of August 13, 2018.
Source: Macrobond. As of August 10, 2018.
Volatility in emerging market (EM) assets is not uncommon and—as we noted recently—does not preclude positive performance over the medium- to long-term. We do not think the current situation in Turkey is a bellwether for the broader EM complex; however, the extent of volatility in Turkish assets will likely challenge investor sentiment towards EM complex in the near-term.
With respect to Turkish assets, some of the concerns driving recent price moves are not new. Many investors—including us—have been monitoring Turkey’s elevated USD funding needs (which we define as short-term external debt and the current account deficit) for the past several years. To gauge vulnerability to a stop in foreign funding flows we evaluate whether countries have adequate FX reserves to meet this measure of funding needs. Turkey appears vulnerable on this metric; its funding needs resemble Frontier Markets and are not too dissimilar to the needs of Latin American countries in the 1980s or Asia in the 1990s¹. However, it is the addition of concerns around heterodox policy and escalating geopolitical tensions that has resulted in a rapid rise in risk premia across Turkish assets in recent weeks.