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Global Research: Turkey



ERIC FINE: Turkey has certainly been in the headlines generating news but it has also been a poor performer and we don't have any allocation to it. What did you learn in Turkey?

NATALIA GURUSHINA: The macroeconomic fundamentals in Turkey are getting worse. The first thing to mention is our beloved twin deficits, a combination of fiscal balance and current account balance. Unfortunately for Turkey, twin deficits will probably be amongst the largest in the emerging markets, close to 9% this year.  When net FDI (foreign direct investment) covers only 2% of GDP, Turkey will remain reliant on highly volatile portfolio inflows, which generally speaking is not good for investor sentiment. It generates liquidity crunches if a local risk-aversion increases.

Another issue that sets Turkey apart within the emerging markets is that the pass-through from the exchange rate to inflation is extremely high. This means that the recent weakness of the Turkish Lira will translate into high inflation pressures down the road. In this environment, I personally cannot exclude the possibility of another rate hike in Turkey, which doesn't bode particularly well for fixed-income assets there.  

My final point is that Turkey is at the beginning of a multi-month election process, which is likely to keep political risks elevated. I would like to get your opinion on that because you have been covering Turkey for many years.

FINE: Turkey is vulnerable but it has always been vulnerable. It has never had enough reserves. Its real interest rates have never been that satisfying, and the political context is the worst I've seen it in twenty years. At the end of the day, Erdogan, maybe not Erdogan, but AK Parti probably survives, mainly due to the failures of the other parties.  It's going to be a big internal fight and we are going to see more headlines, particularly going into March. My view on elections is that they don’t create uncertainty, they invite uncertainty.  That invitation is large and with big, bolded letters for uncertainty there.  It's the first time in maybe fifteen years that Turkey has had this. For most people's investment lives, Turkey has been a strong and pretty good (policy wise) government and that might change.  The vulnerabilities that have always been there may actually become weaknesses. What you learned and what we're doing are very consistent.

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