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GRAPHIC-Emerging market storm shifts from Mexico to Turkey

| LONDON

LONDON Nov 29 A financial market crunch in Mexico following Donald Trump's shock election win this month may have masked Turkey's greater vulnerability to the risk of U.S. protectionism, deteriorating world trade and the resulting fallout for emerging economies.

Mexico's peso, stock market and bonds sold off after Trump won the U.S. presidential election on Nov. 8 with pledges to rip up trade deals and build a border wall to curb immigration.

But after forcing Mexico's central bank into raising interest rates for the fourth time this year , the peso rebounded almost 4 percent from record lows.

And now there are signs that the emerging market storm is moving on to Turkey, whose current account deficit - the amount of money Turkey needs to attract each year to balance its books - is 40 percent bigger than Mexico's at close to 5 percent of annual economic output:

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Alongside ebbing world trade growth, expected rises in U.S. interest rates next month and through 2017 will inflict pain on countries with such large current account deficits by raising the cost of borrowing hard currency on world markets.

But Turkey has political vulnerabilities too. It has detained or dismissed some 125,000 people over alleged links to July's failed military coup. Ankara says the purges are aimed at rooting out coup supporters, but critics fear President Tayyip Erdogan is using the failed putsch as a pretext to curb dissent.

Turkey's ties with the European Union, its key trading partner, are also worsening.

As a result, the lira has continued to weaken, its losses this month almost matching those of the peso - even after the Turkish central bank was itself forced to raise interest rates to stem lira losses despite continued pressure for cheaper credit from President Erdogan:

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Holders of Turkish lira-denominated bonds have lost around 10 percent in dollar terms this month, more than in Mexico or the underlying emerging debt index:

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Finally Turkish sovereign dollar bonds yield slightly more than Mexico's but are some 30 bps above junk-rated peer Brazil and 80 bps more than South Africa, another "deficit" economy:

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"The market sees Turkey as the weak link in the emerging markets story ... One reason is it perceives political risk as higher in Turkey than in Mexico or South Africa," said HSBC strategist Murat Toprak.

"Mexico has played out, the market has priced the U.S. election and now is waiting to see which Trump policies will be implemented and how."

Turkey's biggest weakness may be institutional, with monetary policy seen in thrall to government demands for cheap credit. Last week's rate rise came after seven cuts this year to overnight lending rates.

"What's supporting Mexico is that domestic fundamentals are ok ... Institutions are strong and certainly stable. The concern is that's not the case in Turkey," said Graham Stock, head of EM sovereign research at asset manager BlueBay. (Graphics by Vincent Flasseur and Sujata Rao; Editing by Gareth Jones)

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