Turkey is “an amazingly vibrant, cosmopolitan city brimming with confidence”, say Hans-Paul Bürkner and Burak Tansan of business consultancy Boston Consulting, writing in the FT. “In Istanbul, one can tangibly feel the excitement of a globalising world.” With a young population, a fast-growing middle class, a broad export manufacturing base and an enviable geographic location, the country is booming: GDP tripled between 2002 and 2008. But there’s a catch. “Turkey’s compelling growth story is being obscured by two issues.”
“Turkish growth is unsustainable,” says research group Capital Economics. The latest GDP figure, showing growth of 11% year-on-year, “confirms what we already knew – the economy is overheating”. Excessive domestic demand is “sucking in increasing amounts of imports, resulting in a current account deficit of just under 12% of GDP in the first quarter”. That deficit means Turkey’s boom requires ever- greater amounts of foreign financing – a current-account deficit must be matched by a capital-account surplus. While the quantity of financing has not been a problem, “the quality of funding has deteriorated over the past 18 months”. Turkey is heavily reliant on foreign investment in bonds and equities, which tends to be much less stable than direct investment into business. “As a result, the economy and the lira are looking increasingly vulnerable to shifts in risk appetite.”
Many investors are picking up on these risks and “Turkey has been a very visible underperformer in 2011”, says Jonathan Anderson of investment bank UBS. The stockmarket is down roughly 30% in dollar terms since its October peak, while emerging markets overall are roughly flat. “So the question is: have we priced in enough pain? And is it time to buy Turkish assets again?” But the answer is “a continued ‘no’”. All the indicators are that overheating is likely to worsen rather than improve: credit growth to the private sector is running at 40%, while the central bank has yet to begin normalising policy. Interest rates are at all-time lows and “we have little doubt that inflation will continue to accelerate”. “Turkey is still far from a stable growth path” and local assets would need to be “extraordinarily cheap” to justify jumping in at present.