Turkey's More Balanced Growth Gets Little Credit From Markets

  • Investor reaction muted as current-account deficit disappears
  • Markets haven't priced the improvement yet, BGC's Altug says

A third month of near-zero deficits, combined with higher-than-expected growth, has vindicated Turkey’s Central Bank Governor Erdem Basci and could give investors a cause for optimism after a tough year.

Data released on Thursday showed Turkey’s monthly current-account deficit -- the broadest measure of the difference between goods and services it exports and imports -- fell to $133 million in October, 95 percent lower than a year earlier and following surpluses in August and September. Basci said concerns about the shortfall, which the government forecasts will fall to 5.2 percent of gross domestic product this year, are a thing of the past.

With investors positioning for the first U.S. interest-rate increase in nine years today, Turkish assets have slumped along with those of other emerging markets, even after data last week showed the economy expanded in the third quarter at its fastest pace since early 2014. Combined with a lower current-account deficit, that gives Turkey an opportunity to differentiate itself, according to Mert Yildiz, an economist at Roubini Global Economics.

"On a relative basis, it’s a positive story," Yildiz said by phone from London on Monday. “Even at 3 percent growth, Turkey will be a darling of EM investors."

Brazil, Russia

The $720 billion economy, the largest in the Middle East, expanded by 4 percent in the third quarter, beating all but one of 15 estimates in a Bloomberg survey. The economy will probably grow 3 percent next year, compared with a 1.3 percent contraction seen for Brazil, no growth in Russia and 1.5 percent growth in South Africa, according to Bloomberg surveys.

There’s little evidence that such figures are translating into improved investor sentiment. The yield on two-year lira debt, the worst performer in emerging markets this year after Brazil, rose 19 basis points since the data releases last Thursday to 11.02 percent. The lira, trailing only the currencies of Brazil, Colombia and South Africa this year, weakened 1.9 percent, while stocks are trading near an 18-month low.

Investor Doubts

That probably reflects lingering concerns about the sustainability of Turkey’s economic performance given its reliance on external debt to fuel growth, according to Batuhan Ozsahin, chief strategist at Ata Invest in Istanbul.

"Turkey grows when domestic consumption rises, which does not create a quality track record," he said by e-mail on Thursday. A slowdown in imports could point to weaker economic activity ahead, he said.

The narrowing of the current-account deficit is “impressive, but it’s cyclical, explainable by contextual elements: low oil prices and a steep slowdown in credit-fueled consumption," Philippe Dauba-Pantanacce, an emerging-market economist at Standard Chartered Plc in London, said by e-mail. "These elements are bound to return if and when growth accelerates."

The current-account shortfall declined by 25 percent in the first 10 months of the year to $25.4 billion, driven by a weaker currency that discouraged imports and most of all, plunging commodity prices. The price of a barrel of oil is down by about 40 percent this year.

Few countries benefit more from low prices than Turkey, which imports almost all of its energy. That sets it apart from other markets, including Brazil, Russia and South Africa, whose economies are heavily reliant on commodity exports.

Ozgur Altug, chief economist at BGC Partners in Istanbul, says that as long as oil prices stay low, Turkey’s improving current-account balance will present an opportunity for investors. By the middle of next year, the deficit could fall to 3 percent of GDP on a 12-month basis, he said.

“Markets are not pricing in such an improvement,” he said. “This rebalancing story will be with us for the next six months.”

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