Sharpen your penc ls

Ham sh Pepper, strateg st, Barclays Cap tal

Dünya Executive - - REPORT -

The sell-off in Turkey is starting to spill over into other emerging markets, especially those that need to draw on the global savings pool to finance persistent current account deficits. While contagion from Turkey through the trade and banking channels is likely to be limited in general for emerging markets, investors are likely to sharpen their gaze on the more vulnerable, focusing on funding needs, institutio­nal strength and relations with the U.S. Still, traditiona­l direct trade and banking contagion channels to other emerging markets remain limited, although European asset markets were affected the most, given the elevated lending exposure in developed Europe. Turkey’s increased diplomatic tensions, with the U.S. ,coupled with weak institutio­ns and external vulnerabil­ities, have driven the recent weakness in its assets and we think the pressure on them could resume, as inflamed political rhetoric suggests a reduction in Turkey-US political tensions is not likely imminent. While the authoritie­s have mitigated pressures on FX with liquidity tightening measures, the bar for a decisive rate hike remains high. Even such an action may not provide a long-lasting anchor to TRY stability, absent a reduction in political tensions, but it could increase the financing burden of a real sector facing multiple challenges. However, we believe that Turkey sovereign default risk remains limited in the near to medium term and think that the sovereign curve offers attractive opportunit­ies. (August 17)

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