The cause of Turkey’s recent economic pain seems to have originated with US sanctions.
These may have made an acute contribution. Unfortunately, the country’s economic troubles are essentially chronic and potentially contagious.
On August 1, the US Treasury Department imposed an asset freeze on two senior Turkish officials related to their roles in the detention of a US pastor. Turkey retaliated.
Since, the Lira has lost about 1/3 of its value versus the dollar and the Turkish stock market is down more than -25%.
While reversing sanctions may temporarily ease the agony, the pernicious economic and geopolitical backdrop only portend a protracted downturn.
From 2001 – 2011, many developing countries borrowed heavily in foreign-denominated debt. Much of this debt will come due as the dollar continues to strengthen, perpetuating a cycle of downward pressure on local currency.
Concurrently, China’s slower growth has dented demand for the commodities developing countries typically export. All the while, to keep ahold of power, Populist governments will try to “give the people what they want” swelling deficits via tax cuts and/or largesse.
Based on inordinate foreign-currency private sector debt, the countries most vulnerable to Turkey’s malaise include Argentina, Brazil, Indonesia, Chile and Columbia.
Weekly Update through August 17, 2018 The S&P 500 added 66bps, even as the Dow Jones gained 1.48%, the Russell 2000 added 40bps, the Nasdaq declined -23bps.
As for US bonds, they lost -2bps.
Globally, the MSCI World Index lost -1bp the Barclays Global Aggregate Bond Index declined -7bps.
The Euro Stoxx 50 lost -1.56% in local-currency (Euro) and -1.50% in USD. Meanwhile, the Topix declined -1.31% local-currency (Yen) and -1.03% in USD.
