Posts Tagged ‘Turkey’

The markets are not always rational, and in times of backlash can sometimes punish a country which may have been seen as quite strong under different circumstances.

Credit growth has been common across much of the emerging world, but in some countries while credit growth has grown rapidly it remains at modest levels. No one can be sure how markets may react once QE is ended or even reversed, and we cannot be certain whether markets will punish countries, even if total credit levels are modest.

However, some countries are more obviously more vulnerable to markets reacting against emerging market debt than others.

Egypt, which has both high government debt and a prime fiscal deficit, would appear to be susceptible, as might the Ukraine, the Czech Republic and Croatia. Hungary has gone some way to reducing its prime fiscal deficit, but government debt remains high, which means it may prove to be dangerously exposed in the event of higher interest rates.

Another country to watch is Turkey, although it also offers great potential. The IMF predicts that its trade deficit will be around 7.3 per cent of GDP next year. Unemployment is currently 9.4 per cent.

Turkey’s main stock market index – the Borsa Istanbul 100 – surged some 50 per cent over the 12 months to 22 May – an all-time high. In the subsequent two weeks the index lost 10 per cent. It is not clear whether the falls were down to fears over recent protests, doubts over Turkey’s current account, or merely a correction following such rapid rises.

Turkey’s gross external financing requirement (current account deficit plus debts maturing over the next 12 months) is roughly 25 per cent of GDP.

© Investment & Business News 2013


There seems to be as many reasons for the protests in Turkey as there are protestors. Protestors appear to have quite different ideologies, quite different beliefs, although a desire for more secular politics seems to be a common thread.

But what about the economy?

The Turkish economy has been seen by many as one of the most exciting economies in the world. Indeed, it is one of the TIMPs – Turkey, Indonesia, Mexico and Philippines, the economies that may take over from the BRICS as the countries for investors to plough their money into.

Turkey’s main stock market index, the Borsa Istanbul 100, surged some 50 per cent over the 12 months to 22 May – an all-time high. In fact, the index more than trebled between September 2009 and the peak price two weeks ago.

Not surprisingly, the index has since fallen sharply, down some 10 per cent over the last fortnight

But then again, there might be explanations other than protests for the fall.

Turkey’s problem is its trade deficit and overseas debt. The IMF predicts that its trade deficit will be around 7.3 per cent of GDP next year. Unemployment, by the way, is currently 9.4 per cent, that’s low by, say, Spanish standards, but too high for comfort. Maybe this was a contributing factor to the protests.

According to Capital Economics, Turkey’s gross external financing requirement, that is to say its current account deficit plus debts maturing over the next 12 months, is 200bn, which is roughly 25 per cent of GDP. In fact, its external financing requirement has doubled since 2008.

Many people believe QE has created a bubble in bond prices, that by buying government bonds, central banks have artificially inflated prices, meaning the market for bonds is set for one mighty fall. This may or may not be right, but it is clear that emerging market bonds carry greater exposure than bonds pertaining to, say, the US, UK or Germany.

When it comes to emerging market bonds and the risk of a crash, Turkey is near the top of the pile – unlike, for example, much of South East Asia that this time around, unlike in 1997, has managed to fund much of its debt internally and in any case has not run the kind of debt levels seen in the past.

© Investment & Business News 2013

The penny has finally dropped. When individual countries try to tax companies the results is that the businesses go elsewhere, or hide behind their globalised operation to get around one country’s rules. We demonise Google and Apple, but the truth is that they are operating within the law. And when did it suddenly become immoral to try to reduce taxes while acting within the law?

The solution is global. EU leaders have agreed to agree, that one day they will agree. That may be a little harsh. The EU is to rush through rules to enforce greater transparency in how companies break down their business into the various regions in which they trade.

Ireland has spoken up. Its Enterprise Minister Richard Bruton told national broadcaster RTE that some companies “play the tax codes one against the other”. He said: “That is tax planning and I think we do need international cooperation through the OECD to deal with the aggressive nature of that.” He does, ever so slightly, have the veneer of a Turkey that has just voted for Christmas.

The big problem with the issue of corporate tax, indeed a financial transaction tax, is that the challenges posed by globalisation have been hijacked by those who favour tax cuts no matter what.

When one country, or even a region as large as the EU, imposes a financial transaction tax, or a tax on corporate profits, there is always a risk that multinational companies will simply move to another region, taking jobs with them. And they can always use the multinational nature of their business to circumnavigate paying taxes.

The fact is that across the world, corporate profits to GDP are approaching an all-time high. Much of the money generated by large companies is not creating wealth; rather it is sloshing around the system ending up in government bonds. And because, thanks to austerity, governments are not spending the money the markets want to lend to them, the result is economic stagnation.

The fact is that distribution of income and wealth across the world is becoming more uneven. You don’t need to be a diehard flag carrying member of the Communist Party to think this is a problem. Right now, the global economy needs to see taxes used to take money from profits that are not otherwise being spent, and from financial transactions, to help alleviate the lot of those who are being penalised by globalisation.

© Investment & Business News 2013