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Turkey’s fundamental problem is a shortage of US dollars. Turkish banks currently have approximately USD 70 billion of loans due this year. While Turkish interest rates were in double digits, even at their lows, European banks were keen to lend to Turkish banks, particularly against a backdrop of QE. This money was then loaned to local companies, typically property and construction companies rather than exporters. The result is that Turkish companies are now seeking to repay US dollar debt using, for example, lira rental revenues on a shopping mall. Compounding its woes, Turkey’s imports have exceeded its exports, even including revenues from tourism, and it has the least adequate level of foreign exchange reserves of any major market.
One might legitimately argue that none of these developments are new so why now? We have been negative on Turkey for some time and the biggest surprise for us is that this did not happen sooner. We are currently in a very patient, low rate world and banks have been willing to take on greater risk for 4.5-5% yields. There has also been a slight economic slowdown, which impinges on profits, some worries about credit globally and a strong US dollar. Furthermore, Turkey’s political situation has become increasingly unstable, prompting many wealthy Turks to move their money abroad, the importance of which we think has been underplayed. The ECB’s concerns about the level of European banks’ exposure to Turkey also compounded the lira’s descent.
We believe concerns about contagion are overblown. No other emerging market shares Turkey’s blend of excessive private sector debt, an account deficit and insufficient FX reserves. Argentina ticks two of those three boxes but crucially, none of the emerging markets face the same financing problem as Turkey.
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