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
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:
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:
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:
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:
"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