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Abu Dhabi, UAEMonday 10 December 2018

Turkey back in investors' spotlight as holiday relief ends

Confidence has vaporised and, as business resumes this week, restoring it is crucial if the country is to avoid total economic meltdown

As Turks go back to work, the battered economy will come under under renewed scrutiny. Reuters
As Turks go back to work, the battered economy will come under under renewed scrutiny. Reuters

The devil makes work for idle traders – a paucity of central bank meetings and major data releases means there will be plenty of time for investors to think about emerging markets this week.

And so they should. Turkey’s economy is threatening a meltdown, Russia could be slammed with fresh sanctions and South Africa has found itself in US President Donald Trump’s cross hairs. Not forgetting that the trade skirmish between the US and China will rumble on, too.

Turkey is back to work this week after an extended national holiday. Officials will need to get cracking on an urgent task – restoring confidence. The economy has been running hot for several years, inflation has got out of control and there has been too much borrowing in foreign currency. The Fed’s tightening cycle hasn’t helped. But what really lit the fuse was President Recep Tayyip Erdogan’s heavy-handed management of the economy, Bloomberg said.

The lira has tumbled around 40 per cent this year and was at about 6 to the US dollar early afternoon UAE time on Saturday.

Confidence has vaporised, and policymakers have narrowed the menu of options from which to choose. The main action so far has come from the central bank, which has engaged in stealth tightening, possibly to avoid drawing criticism from Mr Erdogan. Experience of past crises suggests that this will not be enough to stem the crisis.

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Whether it’s Fed policy or Turkey reminding investors that currency crises still happen, many emerging economies have been tarred with the same brush. Russia, for example, saw the rouble dive in tandem with the lira, but other countries look rather more vulnerable on simple macro fundamentals.

Russia has problems the metrics don’t capture. New US sanctions against Russia tied to a nerve agent attack in Britain, which were announced earlier this month, will come into effect on Monday, the US government said on Friday – and sentiment remains fragile. The measures will terminate foreign assistance and some arms sales and financing to Russia, as well as deny the country credit and prohibit the export of security-sensitive goods and technology. according to Reuters.

Another slide in the exchange rate prompted the central bank to suspend foreign-currency purchases, to avoid making things worse.

South Africa is another country whose fundamentals may not justify the market response, Bloomberg said. It scores poorly on some gauges, but the central bank has a good deal more credibility than its counterpart in Turkey and the election of Cyril Ramaphosa to the presidency has boosted investor sentiment.

Like Russia, South Africa has caught the attention of US policymakers. Mr Trump has instructed the state department to investigate proposed changes to the constitution involving the redistribution of land – white farmers own the bulk of it. The spat with Turkey over the release of an American pastor suggests investors could be right to worry about South Africa’s prospects.

Mr Trump has already demonstrated a willingness to deploy economic weaponry in pursuit of foreign policy objectives.