Turkey crisis raises risk of investor shift

The tragedy of Turkey’s currency crisis is that it was largely self-inflicted. And now other emerging markets — and some developed countries — could be tested. Turkey’s trade links with other emerging markets are mostly small as a percentage of their GDP, limiting contagion through that route. The most likely avenue through which its woes could spread is in worsening investor sentiment towards other vulnerable markets.

The background to this is the decade of loose monetary and fiscal policy since the global financial crisis, which led to a surge in emerging countries’ debt. The Institute of International Finance says the combined indebtedness of 30 large emerging markets rose from 163% of GDP at the end of 2011 to 211% in the first quarter of 2018.

The dollar’s rise, combined with higher US interest rates, has delivered a double blow to emerging markets. Argentina was first to see pressure on the peso, in May. It stabilised its currency through muscular interest rate rises and calling in the IMF.

Among other emerging markets, the most exposed will be those investors deemed to lack coherent policies. Brazil looks particularly at risk. SA has a respected finance minister and central bank, but faces doubts over its determination to stick to economic orthodoxy. For the most vulnerable emerging and developed markets the ride could become bumpy indeed. London, August 14