Analysts at ANZ note that the market confidence in the economic and political backdrop of Turkey has collapsed and the value of the Turkish lira has halved and the stock market has been in free fall.
Key Quotes
“Turkey, like many other EM economies, has been on a debt splurge in recent years. Debt as a share of GDP has risen from just under 90% a decade ago to around 140% by the end of 2017 (this is potentially much higher now given the decline in the lira and a sizable share of foreign currency debt).”
“Turkey has responded contrary to most EM crisis playbooks. In particular, it has not opted for interest-rate hikes to stop the plunging lira nor has it sought emergency funding from the likes of the IMF. More troubling, the government has escalated its tariff row with the Trump administration.”
“How all this plays out is important not only for Turkey, but also for other EM economies that may have to cope with financial contagion, as investors may look to punish similarly fragile sectors and economies.”
“Initially there was some negative spill over.”
“For now, we don’t anticipate widespread contagion and believe that there is a unique political dimension to the Turkey story. Our view is based partly on the observation that there have been limited movements in EM sovereign CDS spreads.”
“Our Asia team is not expecting Turkey’s troubles to filter through into the region. That said, some economies in that region are more vulnerable relative to others, notably India, Indonesia and the Philippines.”
“The quicker Turkey takes the traditional medicine the less likely this event will have negative spill over. The longer it delays, the greater the potential for contagion.”
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