Alert Sign Dear reader, online ads enable us to deliver the journalism you value. Please support us by taking a moment to turn off Adblock on

Alert Sign Dear reader, please upgrade to the latest version of IE to have a better reading experience


Turkey mirrors problems of emerging markets

March 10, 2014

Not so long ago Turkey was the very symbol of the resurgence of emerging markets. Today it encapsulates their three most critical flaws: rising indebtedness, large current account deficits and stale political regimes.

When Recep Tayyip Erdogan, prime minister, took office in 2003 he was quick to establish himself as a leading reformer by focusing on economic rather than controversial religious issues, which some had feared given his roots in political Islam. The results were impressive. By 2010 public debt had fallen from 90pc of gross domestic product to 40pc; inflation - more than 50pc in the 1990s - also tumbled and today stands in single digits.

He was not alone. Together with Vladimir Putin of Russia and Luiz Inácio Lula da Silva of Brazil, Mr Erdogan formed a populist-turned-pragmatist trio that help set the stage for an emerging market revival. As budget deficits and inflation were brought under control, interest rates came down, and the average growth rate of emerging economies doubled to more than 8pc by 2007.

But now the average GDP growth rate of Turkey, and the emerging world, has fallen back to about 4pc and Mr Erdogan and his peers are relying on more debt and short-term capital flows to bolster economic growth. This form of resuscitation is fraught with major risk. Since the second world war, nations that aggressively increased private credit as a share of GDP by 5pc a year or more for five straight years have often run into financial trouble. Today Turkey, along with Brazil, Thailand and China, is in this danger zone.

The attempt at such heroic intervention often reflects the hubris of complacent administrations. Many of the leaders who spearheaded the boom of the past decade are unwilling to let go of that golden era — or to leave office. In the 20 largest emerging nations, the average time in office of the government has doubled since 2003 from four years to eight years.

It was no coincidence that by last summer investors were pulling back from the emerging world as the various flaws in those markets were exposed by tightening global liquidity conditions. Many of the countries had been racking up large current account deficits, suggesting that they were living beyond their means, consuming more than they can produce.

Though analysts and politicians often blame capital flight on foreign speculators, typically it is well-informed locals who are the first to flee. This is clear in Turkey, where the central bank has admitted as much, with locals converting their bank deposits from liras to dollars at a rapid rate.

Now, the world is watching for what comes next. The issue: when does a current account deficit become large enough to trigger major economic trouble? A look at the data, which go back to 1960 for 186 nations, shows that when a large economy runs a current account deficit equal to at least 5pc of GDP for at least five years, it is highly likely to face a significant economic slowdown and a currency crisis.

Turkey is now on track to run a current account deficit of more than 5pc of GDP for its fifth straight year. This puts the country in a rare predicament. Since 1960, 15 large economies have run a current account deficit of this scale and duration. They include Poland and Norway in the 1970s, Brazil in the 1970s and 1980s, Thailand in the 1990s and Greece in the last decade.

Of these countries, 13 saw growth slow significantly over the subsequent five years, from a mean pace of 5.8 per cent to 3.2pc; and 11 suffered a currency crisis. If Turkey follows this path, its annual GDP growth will slow by half in the next five years, to barely 3pc.

For years, Turkey has relied heavily on outsiders to fund growth due to a host of factors, including its weak savings rate, its reliance on foreign sources of energy and raw materials, and its relatively backward export manufacturers. Indeed the Erdogan government had been trying to lower the country’s chronic vulnerability to current account deficits, for example by raising domestic savings. Like many stale administrations, however, it lacks a sense of urgency and now it may be too late.

The writer is head of emerging markets and global macro at Morgan Stanley Investment Management and author of ‘Breakout Nations’