As the Turkish lira weakened against the dollar and went beyond 4.5 for the first time, the central bank indicated that it is going to take remedial measures to fix the issue and bring in radical changes if required.
The situation has ignited fears that the Turkish president Erdogen would curb the independence of the central bank. Erdogen personally believes that borrowing cost has to be lowered for enhancing credit growth and infrastructure developments. Inflation in Turkey touched 10.85% last year itself as compared with an average inflation of 4.6% in the developing countries (read: Turkey ETF Slides Ahead of Thanksgiving on Political Crisis).
Turkey grew at 7.4% in fiscal 2017 which was the fastest among the G-20 countries. Cheap credit fueled the growth but pushed Turkey into a debt trap. A weakening Lira, a massive current account deficit, debt-laden business and selling of bonds have put the economy into a deeper crisis. Most analysts are of the opinion that the long-term depreciation will result in distress of the private sector and increase volatility of the exchange rate.
After the 2008 crisis, Turkey eased its monetary policies and borrowing became cheaper. Foreign investors saw the opportunity and pumped in huge amounts of money. This pushed the debt levels higher and repayment became expensive because rates became expensive in the United States and Europe, putting Turkey’s economy under pressure. Government spending and lower interest rates helped Turkey to grow fast, but in 2016 after an attempted coup to remove Recep Tayyip Erdogn the economy suffered due to uncertainty and a fragile government. After this incident, the government increased its spending in large defense projects and by the end of 2018 the fiscal deficit is expected to reach $17.28 billion.
In April, Erdogan announced presidential and parliamentary elections to be held in November 2019, but switched over to an early election in June 2018. The election perhaps explains Erdogan’s intent to secure more power as he believes that winning decisively would silence his protestors and a growing segment of angry youth, who want to voice their opinion. Per a constitutional referendum passed last year the president will have enormous power and will be able to remove the prime minister’s post as well as hamper the parliament. Most critics see this as a complete authoritarian takeover by the Turkish president which will have a long-term impact on both financial and political decision making (read: Is Taper Tantrum Back in 2018? EM ETFs in Focus).
TUR in Focus
IShares MSCI Turkey ETF (TUR – Free Report) tracks the investment results of an index composed of Turkish equities on the MSCI Turkey Investable Market Index. It has amassed assets of $247 million and has 68 holdings in its portfolio. The fund charges annual fees of 62 basis points and the top sector holdings in this portfolio comprises Financials (32.3%), Industrials (17.7%), Materials (14.2%) and Consumer Staples (12%). Its average daily volume of trade is 356,700. As far as individual holdings are concerned Garanti Bank, Akbank A and Erdemir are the top three holdings, with none holding more than 9%. It has negative returns of 23.26% on a YTD (year-to-date) basis. The fund has a ETF Rank #5 (Strong Sell) (read: Are Good Times Over for Emerging Market ETFs?).
The iShares MSCI Turkey ETF (TUR) was unchanged in premarket trading Tuesday. Year-to-date, TUR has declined -24.76%, versus a 2.44% rise in the benchmark S&P 500 index during the same period.
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