August 13 was a blue Monday for emerging markets when a fall in the Turkish lira of 8% against the dollar sent shock waves through currency and equity markets.
The trigger for this particular fall in the Turkish lira was the announcement by US President, Donald Trump that the US was to impose sanctions on the Turkish justice and interior ministers, in reaction to the continued detention of American Pastor Andrew Brunson. He has been held for nearly two years over alleged links to political groups and a supposed failed coup. Trump has also approved the doubling of tariffs on Turkish steel and aluminium.
Of course, this political spat over an imprisoned American pastor is not an economic or currency crisis in itself, but it has highlighted a number of problems in the Turkish economy and other emerging economies like Argentina and South Africa.
Background to Turkish economy
Turkey has made significant progress since the debt crisis in 2008.
GDP has almost doubled between 2009 and 2017, while GDP per capita in dollars has risen by 72%. Unemployment has been stable around 10% and inflation slowed from 10.4% in 2008 to 7.8% in 2016. Fitch forecasts growth of 1.2% for Turkey in 2019 but pointed to considerable uncertainty for the economy. Growth was 7% in 2017.
Consumer inflation reached 18% in August and is expected to rise further as the currency weakens and interest rates rise. Producer price inflation was running at 32% in August. The Turkish lira has declined from around 3.78 to the US dollar in January, to around 6.85 in August at the time of Trump’s announcement. It has since strengthened slightly (see chart).
At its MPC meeting on 13th September, the Central Bank of Turkey hiked interest rates by 6.25% to 24% in order to try to protect the currency and prevent further outflows as residents rush to buy foreign currency. President Erdogan is unhappy with rising interest rates that will negatively affect growth but the central bank has little room to manoeuvre. There are also concerns that companies which borrowed heavily in dollars and euros to profit from a construction boom will now struggle to repay debt after the sharp fall in the lira. Erdogan is confident that Turkey will weather the economic storm but others fear that the political set-up is not conducive to proper economic management.
Background to Argentinian economy
Argentina has also made significant progress since the debt crisis in 2008.
GDP has risen by 35% since 2009, while GDP per capita is up by 24%. Unemployment has remained between 7% and 9%. Inflation hovered around 10% over this period, but rose to 25% in 2017. In December 2017, the Organisation for Economic Co-operation and Economic Development (OECD) was forecasting growth of 3.2% for Argentina in 2018. In May it revised its forecast to 2%. In August the Argentinian government expected growth to be negative for 2018 but is still hoping for growth in 2019. With inflation now running at around 32%, the Argentinian peso has fallen from 18.37 to the dollar in January to almost 40.00 in mid-September (see chart). Interest rates were raised to 45% a few weeks ago. In April the government was prompted to access a $50 billion facility from the IMF. A major negative factor for the economy has been a devastating drought that has decimated the harvest of corn and soybeans. Unfortunately, agriculture is the backbone of the economy. When President Macri was elected in December 2015, he took the bold step of removing all exchange controls, before stabilising the economy and implementing economic reforms. With hindsight this could have been a serious error as the currency is now in free fall. The reintroduction of exchange control in coming months could be an option.
Background to South African economy
South African GDP has risen by 33% since 2009, while GDP per capita has grown at a slower rate of 18%. This is largely a result of high unemployment of unskilled workers where the rate has increased from about 23.5% in 2009 to 27.5% in 2017. Inflation has declined from 7% to below 5%. Interest rates remain at multi-year lows.
Over the past few years South Africa has also experienced a drought, in both the summer rainfall region and the winter rainfall region. However, probably the most significant overriding negative factor has been the nine-year presidency of Jacob Zuma. Under his tenure corruption and crime escalated, a degree of state capture syphoned billions of dollars from the economy and growth took a back seat while politicians lined their own pockets.
Although the rand has weakened from 12.5 to the dollar in January to 15.65 in early September, it has recovered somewhat to 14.3 currently (see chart). Still in the aftermath of the Zuma administration and following drought in the winter rainfall region, the economy is technically in recession, recording a decline in Q1 and Q2.
The drought in the winter rainfall region has now been broken, with dam levels recovering from historically low levels of 20% to over 70% in 5 months. This bodes well for the wheat and wine industries in the coming season as well as tourism. Moody’s has recently upgraded its rating of South African banks from a negative outlook to a neutral outlook. On 21st September, President Ramophosa announced a $30billion spending programme to stabilise the economy and stimulate growth. The emphasis will be on agriculture, mining, infrastructure and tourism.
The emerging market crisis could still spread to other vulnerable countries with shaky economies but the South African economy is coming off a low base rather than a high base and we do not believe that it should be caught up in any contagion.
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