Enis’s Macro Wrap – Turkey and Emerging Markets

by Enis September 11, 2012 6:46 am • Commentary

Greetings from Turkey.  I arrived here yesterday.  I’ve visited Turkey dozens of times in my life, as most of my family lives here, and I’ve witnessed firsthand its rapid evolution over the past 20 years.  It’s gone from emerging market backwater to emerging market darling in the past 10 years, after a particularly nasty hyperinflation during the 1990’s that ended in a severe banking crisis and an IMF bailout around 10 years ago.

In fact, I still remember back-to-back visits during the 90’s, when I saved my 1,000 Lira bills, only to return 2 years later to see that the same 1,000 Lira could only buy what 100 Lira could buy 2 years prior.  Imagine trying to plan business investments in such an environment.  Not surprisingly, roads were often left half-built, and electricity and water service was spotty.  Today, the memories of those hardships are still in the back of many citizens’ minds.  The IMF program was despised and ridiculed, but the end result was better fiscal discipline on the part of the government, much better targeted government infrastructure, and increased stability for private investment.  Turkey’s economic situation is on much better footing than at any time in the past 20 years.  There are of course still legitimate criticisms, but the overall path remains encouraging.  Perhaps if developed countries would agree to the IMF terms they espouse to their less-developed brethren, the budget process would not be annual exercise in dysfunctional politics (Europe and Japan are as bad as the U.S. in this regard).    

One thing I’ve noticed over the last few years, though, is how expensive most foreign products are in Turkey compared to the U.S.  Housing, food, and labor are much cheaper in Turkey, especially outside of Istanbul.  Yet, particularly for durable goods, such as washers, dryers, furniture, cars, and the like, Turkey is in fact more expensive than the U.S., despite a per capita income level 20-30% of the U.S.  In Turkey, as in many emerging markets, demand has been juiced by bank credit, and in the short-run, consumption seems at risk if / when that credit tap dries up.  European banks pulling back in the past year has had a certain impact on the weakness in emerging market demand relative to the rest of the world in the past year.


Markets overnight:

  • Asia ended mixed after the weak close in the U.S.  Risk-on once again gained some ground as the European open approached, with the dollar selling off vs. most major crosses, but European stock indices have not been able to make it to unchanged all morning, and are still in the red by about 0.5%.  SPX futures indicate an open near flat.
  • Commodities have shown significant strength since Draghi spoke Thursday morning, and gold and silver had a strong overnight session again, up 0.5-1%.  Oil and copper are flat, with oil showing the least strength among industrial commodities in the past week
  • The German Constitutional Court decision might be delayed as German lawmakers have requested that the Court reconsider its decision in light of the ECB’s move last week for potentially unlimited bond buying.  The market seems much more focused on Bernanke and the FOMC though.