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Is another crisis brewing in Turkey?

Is another crisis brewing in Turkey?

Rampant inflation and booming credit are causing external imbalances

Paul Della Guardia
July 13, 2024 • Estimated Reading Time: 8 minutes

China Floats Private Creditors Role in Early Debt Rework Talks
Emerging Markets: The Year’s $321 Billion Bond Spree Is Set to Catch Its Breath
Assessing Russia’s shadow fleet build up

Chart Spotlight: Is another crisis brewing in Turkey?

Looking across the emerging markets complex, Turkey stands out as one of the larger, systemic EMs that is rapidly headed in the wrong direction. Inflation has of course been the main symptom of imbalances in the economy, gyrating between 40-80% since 2022. It currently stands at around 70%, despite the central bank hiking the policy rate from 45% to 50% in March.

Part of the reason behind rampant inflation is an ongoing credit boom in the country. Private firms and households account for much of the borrowing, with worryingly strong growth in credit card debt. Lenders are issuing more debt in foreign currency, which increases currency risks. Non-performing loans remain low, but the central bank has tightened macroprudential regulations in response to this recent credit growth.

At above 33 to the dollar, the lira is at record lows. Even so, Turkish export competitiveness is eroding as the real exchange rate with trading partners has surged by more than 5% YTD through end-May.

With the lira tanking, inflation is of course driving real exchange rate appreciation. Prices have been rising much faster in Turkey than has been the case with its trading partners in 2023 and 2024.

It seems that so far Turkey has had somewhat of a reprieve from these brewing imbalances. Not only does loan performance remain decent, but the current account deficit was “unusually” small in May. The carry trade is driving surging portfolio and bank flows to Turkey, which has driven official reserves to increase to $148 billion in June.

Still, Turkish foreign exchange reserves are low compared to EM peers. They currently stand at 13.3% of (2023) GDP. While an improvement since last year, that’s still only 4.9 months of imports.

So it’s certainly worth keeping an eye on increases in the country’s external financing needs. An increase in the current account deficit and/or an abrupt halt to the carry trade flows linked to further worries over lira weakening could see the central bank dip into its reserves to cover gaps. Watch this space.

Headline Roundup

Sovereign Debt

Restructuring:
- China Floats Private Creditors Role in Early Debt Rework Talks
- Paris Club: Comparability of Treatment
- IMF to Consider Options to Lower Penalties on Big Borrowers
- Navigating today’s debt restructuring landscape
- Gargantuan debt servicing poses threat
Issuance:
- Emerging Markets: The Year’s $321 Billion Bond Spree Is Set to Catch Its Breath
- Saudi Arabia Dethrones China as Top Emerging-Market Borrower
- EM sovereign debt H1 report card: Frontier leads the pack again
- Bond issuance from EM state-owned enterprises on the rise – mid-year review
- Half of All Emerging-Market Debt Issued by Core Islamic Finance Markets
- Record Emerging Market Sovereign Debt Sales Bring Opportunities and Risks for Investors
Sri Lanka:
- Sri Lanka Inks Final Pacts to Recast $10 Billion of Debt
- Sri Lanka reaches deal with creditor nations over $5.8bn of debt
Kenya: Kenya on Tightrope as Options Fade to Scale $26 Billion Debt Wall
Turkey: Turkey Sells $1.75 Billion in Third Global Bond This Year
Gabon: Des arriérés de dette dissimulés par le régime Ali Bongo selon Moody’s
Zambia: Buy '53s on weak performance and high probability of upside trigger
France: How are markets reacting to the French snap election?

Geoeconomic Fragmentation

Russia:
- Assessing Russia’s shadow fleet build up
- Russian exports of diamonds to Hong Kong up 18-fold in 5M24
US:
- Immigration Is Behind the Strong U.S. Economy
- Migration restrictions and damages to the US economy
China-US:
- Chinese companies seek assurances from Malaysia on avoiding US tariffs
- China's Fentanyl Indifference Has Created an American Crisis
China:
- China issues rare earth regulations to further protect domestic supply
- Indonesia to impose up to 200-pct import tariffs on Chinese goods
Europe: Hungary vows to use its EU presidency to "Make Europe Great Again"