Turkey’s benchmark index, the ISE, has fallen by around 7% from its autumn high. Investors are quite right to be worried, says Société Générale, as “overheating has become a serious macro risk”. With inflation rising and the economy growing at an estimated annual pace of 9% in the first quarter, the risk of a hard landing is growing.
Turkey has kept its crisis-induced fiscal and monetary stimulus going for too long, according to Ahmet Akarli of Goldman Sachs. Wage growth has hit 18% year-on-year; domestic demand is climbing by as much as 25% and credit growth in April was up by 36% from a year earlier. Turkey’s current account deficit hit a monthly record in March as consumers gorged on imports. It was initially expected to reach 5.4% of GDP this year but is now heading for 8%. Core inflation has jumped to a nine-month high.
The central bank has been trying to cool the economy by raising bank reserve requirements and lowering rates. The idea behind rate cuts is to lower money flows into the country. But consumer loans remain easy to access and “money continues to pour into Turkey, making monetary conditions excessively loose”, says The Economist. Interest rates need to rise and the government should clamp down on spending, say analysts.
According to Goldman Sachs, however, earnings estimates and valuations don’t yet reflect the extent of the tightening required. Another danger is that short-term money flows are plugging the current account deficit. So Turkey is especially vulnerable to investors taking their money out of the economy if there is an external shock or a rise in risk aversion. At this stage “there is too much uncertainty”, says Isik Okte of Finans Invest, to entice buyers into the market.