Just back from Istanbul, where the economy was bottom on my lists of concerns (I’m writing a book on broader issues). Turkey is an island of stability in the Muslim Middle East. On a stroll down Istanbul’s equivalent of Bond Street or 5th Avenue Sunday, I ran into three demonstrations. One was a well-organized bunch of steelworkers wearing their Turk Metall baseball caps; another was a small group of Greens pushing renewable energy; and a third was unidentifiable, but tiny. The Turks twice returned the Islamist AKP and like their belligerent prime minister Tayyip Erdogan. He runs around the world insulting Turkey’s prospective partners, most recently Germany, but that makes him all the more popular. But there are a number of reasons I wouldn’t touch the Turkish market. There’s no wounded ego like that of a former imperial power, and the Turks nurse a deep-seated grudge against the world. Erdogan plays well to this.
The Turkish stock market has tripled over the past couple of years:
The MSCI Turkey Investable ETF doesn’t seem too expensive with a p/e of 10 and a dividend yield just over 2. But the country has a mass of vulnerabilities.
1) Higher oil prices — Turkey’s oil bill was around $22 billion in 2010, I would estimate, with an average oil price of $79. It goes up to $30 billion if oil averages $110 during 2011. That means a doubling of Turkey’s current account deficit, already over 6% of GDP.
2) Tighter money — as the IMF warned last week, Turkey is financing its current account deficit with short-term capital inflows. That’s fine as long as the European Central Bank and the Fed offer money at zero and Turkey pays high yields. But that could blow up in Turkey’s face. Today:
March 1 (Bloomberg) — Turkish yields rallied to the highest in nine months and shares fell after manufacturing grew at the fastest pace on record and oil rose, stoking speculation the central bank will be forced to increase interest rates.
Yields on benchmark two-year lira bonds rose 17 basis points to 8.95 percent at the 5:30 p.m. close in Istanbul. The lira weakened 0.8 percent to 1.6107 per dollar and the main ISE National 100 stock index fell 4.2 percent to 58,709.33, the steepest decline since May 25.
3) Islamism — Prime Minister Erdogan is pursuing an Islamist agenda that began with the persecution of regime opponents, including prospective opponents from the country’s secular military as well as hundred of journalists and academics. So far the world has given Erdogan a pass. But Turkey’s only real resource is a Western-oriented technical and managerial caste. Most of them are at least thinking about emigrating, and if Erdogan goes too far, many of them will–and the country’s economy will collapse.