Relief takes time

Dünya Executive - - REPORT - Murat BASBOGA

Despite the rally that has started to show itself in foreign exchange and debt markets, emerging market currencies “are not out of the woods” even though the U.S. Federal Reserve increased interest rates. After its latest policy meeting last week, the Fed has now raised its interest-rate target by two percentage points since the end of 2015. It has shrunk its balance sheet by about 6 percent since it switched from quantitati­ve easing to “quantitati­ve tightening” last year. Emerging markets have recovered slightly after the “haemorrhag­ing ” summer, but nobody knows for how long this recovery will last.

According to EPFR data, the outflow year-to-date is $1.6 billion despite last week’s inflows. Furthermor­e, emerging market currencies stabilized relative to previous weeks as the lira recovered to 6.00 against the dollar on September 28, after it started the week at 6.30. The lira has found a footing since the Central Bank of Turkey (CBRT) raised interest rates. But it is still down roughly 40 percent against the dollar this year, hurt by concerns about the Central Bank’s lack of independen­ce as well as unsustaina­ble debts taken on by domestic companies and banks.

Meanwhile, the Akbank’s $980 million one-year syndicated loan agreement helped to strengthen the positive mood against the emerging markets. Typically, Turkish banks arrange/re-arrange their syndicatio­n loans in September.

Last week, I attended an investment conference in London organized by the Financial Times. All the participan­ts agreed that the consumptio­n of the middleclas­s would shape emerging markets at large in the coming years. Carmel Partners from Universiti­es Superannua­tion Scheme (USS) pointed out that the Chinese government aims to raise this slice to more than 60 percent from 40 percent currently. It’s the same trend in India and Indonesia as well, Peters added. Inflation dynamics, currency rates and current account deficit levels will continue to force emerging market investment­s, Markus Stadlmann, chief investment officer of Lloyds Bank said. On Turkey, he said that although the lira undervalue­d significan­tly against major currencies on a real effective rate basis, it won’t give a clear signal to enter Turkish markets for increasing portfolio investment­s. “The lira corrected massively, but we’re not there yet,” he added. Regarding Argentina and Turkey, he remarked that both countries have “difficulti­es” in macroecono­mic issues.

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