The Turkish economy has been in a state of disarray following a sharp fall in the country's balance ...
The Turkish economy has been in a state of disarray following a sharp fall in the country's balance of payments, according to Michael Hughes, client portfolio manager for emerging markets at Chase Fleming.
He says Turkey is going through its second major economic crisis in less than six months. Domestic debt stands at $4.5bn and the currency is depreciating against the dollar.
In addition, foreign investors have pulled out of the market. For the year end to March 2001, the Turkey stock market has fallen 42.82% in local currency terms. Hughes warns there are concerns from foreign investors that the economy is in turmoil after a public disagreement between president Ahmet Necedet Sezer and Prime Minister Blucent Ecevit, casting doubts on the integrity of some government officials.
Mohamed El-Erian, head of Emerging Markets at Pimco, says: "The population is losing trust in the economic management of the country and the Government needs financial support." El-Erian explains the banking industry is in trouble and cannot meet its margin loans, plus there is a lack of liquidity in the system. Bond yields have risen from 70% to 120% in response to the uncertainty
Pimco's view is that the situation in Turkey cannot continue if interest rates remain high. GDP growth is estimated for 2001 to fall below 1% if the situation continues. However, El-Erian warns the currency crisis is liable to worsen if interest rates are reduced too quickly.
At Chase Fleming, the main concern is the Turkish government's inability to service its domestic debt and the flotation of the Turkish lira, which may have very wide fluctuation gaps in the middle of such uncertainty.
El-Erian adds the announcement of former World Bank vice-president Kemal Dervis as Turkish economic minister should help the economy.
Hughes believes the Government needs to show strict commitment to policies formulated by the IMF to improve the macroeconomic situation of the country. "Our concerns about the long-term outlook in Turkey have led us to heavily underweight the country in all our funds."
Chase Fleming also has some defensive positions in Turkey, which have included well-capitalised banks that can benefit from increasing interest rate spreads and food retailers.
Hughes adds: "We continue to monitor the economic and political situation in Turkey closely. It is unlikely that we will increase our positions unless we have a clear view on a government structure and a support package by the IMF or the US or Europe."
Giles Neville, product manager at Schroder Investment Management, says the key issue for emerging markets in the short term is the timing of any recovery in the global economy.
He says: "The various moves to lower interest rates will be an important catalyst for better performance from emerging markets, and we expect growth expectations to move away from the current pessimism in the second half of 2001."
Although performance is likely to be volatile over the next few months, Neville says reform at company and country level is reducing risk profiles and should lead to the discount in valuations between emerging and developed countries narrowing.
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