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Along with Turkey, Brazil, India and several other countries, South Africa is considered one of the more vulnerable emerging markets (EMs.), according to the team at financial services company Levantine & Co.
They explain that the Turkish crisis has fuelled concerns of contagion to other markets, resulting in international investors taking “risk-off” and reducing positions in the riskier asset classes.
Added to this, interest rates in the US have been on the rise, leading to investors being significantly more cautious when searching for high yields elsewhere.
The situation in Turkey is not expected to go away anytime soon, and in fact will probably get worse before getting better, in their view.
"The spill-over effect will likely continue in other asset classes to differing degrees. We may see continued volatility in EM currencies and financial institutions that carry significant EM risk may continue to de-risk," according to Levantine & Co.
"For now, markets may be spooked, but there does not seem to be any reason for concern in stronger asset classes, such as the US dollar, yen and developed market assets."
Turkey
The Levantine & Co. team provide an overview of the situation in Turkey:
In 2016 Turkey's President Recep Tayyip Erdogan opened the Yavuz Sultan Selim bridge, the third toll bridge to cross the Bosphorus straits and the widest suspension bridge in the world.
The $3bn mega project was part of the president’s $200bn infrastructure drive announced in 2013. The next jewel in the crown will be the $12bn international airport expected to open in Istanbul by December 2018.
These projects are built on the Public Private Partnership (PPP), Build Operate Transfer (BOT) model. In such cases companies provide a bid to build and run a project for a period of time and the government accepts the project that best meets the criteria, similar to the South African Renewable Energy Independent Power Producers Programme.
Unlike South Africa, the projects in Turkey are given hard currency revenue guarantees, meaning if target revenues are not reached, the government pays the differences in US dollar or euro to the project sponsors.
In 2001 Turkey went through a public-sector debt crisis, which was resolved with an IMF programme and by Kemal Dervis, a renowned economist who, as minister of state for economic affairs, under the Ecevit government, was the architect of the successful economic recovery programme.
In 2002 the AKP (Erdogan’s party), was elected into government, and continued with the prescription provided by Dervis. The economy saw record growth and went through the 2008 crisis relatively unscathed.
In 2011 the Turkish economy showed signs of slowing down and this is when we started to see changes. A year earlier, the then Prime Minister, Erdogan, was looking to bring a presidential system with executive powers to Turkey. This would require several elections commencing with the 2010 Constitution Reform Referendum and ending with the recent 2018 general election.
Fuelled by the ample liquidity provided by central banks pumping money to stimulate the global economy, the Turkish government looked to stimulate the economy by incentivising the private sector to borrow and promote public and private construction.
The economic policy that drove growth came at a cost. Turkey’s current account deficit continued to surpass expectations, reaching $5.89bn in July 2018 and the debt to GDP ratio steadily increased from a healthy 36.65% in 2011.
The deteriorating economic situation in Turkey has been a concern for Turkey for some time and its currency had already been losing ground. So, all that was needed to tip the boat was a trigger. This came in the form of the spat with the Trump administration over Andrew Brunson, an evangelical pastor who was arrested in post-coup purges.
The Turkish government refused to interrupt the judicial process and release the pastor unless the US handed over Fethullah Gulen, a Turkish cleric who resides in Pennsylvania and who the Erdogan government blames for the failed 2016 coup.
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