Blogginlägg med etiketten Turkey

This means that AKP can form a majority government and thus continue with their successful and liberal economic policy. They will not, however, be able to change the constitution on their own. They got 326 seats in parliament but needed 330 seats to change it with a referendum and 367 to change it single-handedly.

Turkey needs a new constitution, and might get one during this term, but these changes should preferably be reached through broad parliamentary discussions and support rather than by the will of one party. The immediate focus should now return to the economy and more specifically to make sure that it slows down – yes, it is growing too fast – in an orderly fashion. 

Ps. We will discuss this and many other exciting topics at the East Capital Summit in Istanbul on 14-16 September.

 
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That sounds good but it is actually starting to turn into a problem. Now, it is not a Greece-kind of problem and I guess many countries in Europe would be happy to change problems with Turkey. But an economy that is growing too rapidly runs the risk of overheating and that is a problem since it is difficult to cool off the economy in an orderly way. The underlying driver of the growth in Turkey is very rapid credit growth, loans are increasing close to 35% on a yearly basis, which has caused a shopping spree among Turkish consumers and an investment boom among the companies.

The middle class is buying electronics, cars and clothes while the companies are buying various investment and intermediate goods.

The problem is not that Turks are overleveraged – loan to GDP is a moderate 50% and mortgage penetration is in single digits while car ownership is a quarter of the level in Greece – but that many of these products are imported, which creates a trade and current account deficit. The deficit needs to be financed and financing can easily dry up or become expensive if the market decides the level is unsustainable.

Again, these are real problems but the magnitude should not be exaggerated or compared with those in Southern Europe. Turkey had a real economic crisis ten years ago and it did learn an important lesson back then, which helps to maintain stability these days, and that is the merits of having a prudent banking sector.

That interest rates are hiked when there is overheating pressure in the domestic economy is as close to a universal law in economics one can get. But Yılmaz and his colleagues at the bank stunned observers by lowering the policy rate by 50 basis points to 6.5% this week.

The reason is rather clear though, as the Central Bank is also concerned about a rising current account deficit due to global liquidity-related capital inflows and a strong currency. Our Turkey analyst explained the dilemma: hiking the rates because of the overheating issue will increase inflows even more, while cutting the rates because of the inflows will further heat the economy. This dilemma is the reason behind the rather unorthodox policy of cutting the short term rates to limit inflows while increasing the reserve requirements for deposits further to curb credit growth.

It remains to be seen how effective this policy will be, but it is in any case refreshing to see this kind of innovative economic policy-making.

A large number of relevant questions were posted and we moved quickly around East Capital’s investment universe to cover as many of them as possible.

China was the first region to be brought up. This was specifically relating to East Capital’s recently signed acquisition of the Chinese dedicated asset manager Asia Growth Investors. Commenting on “Why China?” my short answer is that China is impossible to ignore when investing in Eastern Europe and that there has been, and certainly is a clear linkage between Russia and China. 

As usual Russia was brought up by many web TV viewers and among many other topics we discussed its main growth drivers and our favoured stocks.

The buzzword in Moscow is 'modernisation', as in modernisation of the economy and of the political system, through economic reform, fighting corruption and the move to democracy. The modernisation of such elements provokes much more positive feelings that will help Russia in maturing as a serious contender.

The successful return to the sovereign debt market also stands to benefit Russian equities.

Other markets we discussed were the Baltics, Turkey and Poland for which we pointed out opportunities as well as potential risks.

The tragic and unexpected death of the Polish President, Lech Kaczynski, has had little effect on the Polish economy. A brief blip in the currency markets in the days following, but little volatility. This shows the strength of the economy and the development of Polish institutions. Growth in 2009 has resulted in a more steady recovery and more stable market.

Growth in the Baltics is being revised and has been low but without doubt, better than expected. For example, Estonia has already met the formal criteria for the Eurozone and this has had a positive effect on its stock market, reducing market uncertainty. The impact of accessing the Eurozone will have more longer-term benefits.

Turkey is a country still very much on the East Capital Universe radar. It is area for long term focus as it is supported by what is now a remarkably strong demographic profile. The fruits of lower interest rates and inflation, coupled with a growing population, will have a profound effect on the economy.

We also commented on the less performing markets such as Greece, Slovakia and Slovenia and their relation to the Eurozone.

See all the topics and watch the programme at www.eastcapital.com/live