“I believe that Turkey is the weak link in the emerging market chain,” writes Bank of America strategist Joseph Quinlan on TheGlobalist.com. That’s not a particularly controversial viewpoint right now: the Turkish stockmarket has dropped by 26% from its record high and investors are fretting about all sorts of problems they had overlooked. But Quinlan should be given full marks for prescience. His article was first published in March, when money was still piling into a runaway market that had gone up by a barely believable 390% since October 2002.
What are people suddenly worried about? A great deal. “Turkey was one of the star performers in the emerging-markets boom,” says The Economist. The mildly Islamist rule of prime minister Recep Tayyip Erdogan has delivered “unprecedented political stability and fiscal discipline”. The economy is growing strongly and accession talks with the EU are under way. But these positives hide problems. Inflation is rising and the ability of the new central bank governor is being questioned: last week, he shocked markets by raising interest rates by 1.75%. The current-account deficit was more than 6% in 2005, and while people “may tolerate a current-account deficit of this magnitude in a market as deep, liquid and diverse as the United States, investors are rarely as kind to such conditions in an emerging market”, says Quinlan.
The strong lira and competition from China have hurt exports. And political instability is worsening ahead of elections next year. “No one thinks that Turkey is anywhere close to its precarious position in 2001, when the economy shrank by around 7% and the country flirted with debt default,” says The Economist. But “the surprise, perhaps, is that investors remained sanguine for so long”.