Turkey’s vulnerabilities come home to roost

The risks posed by Turkey’s heavy dependence on foreign capital inflows came to a head this month, with the lira falling the furthest of any EM currency in November. This has been driven in part by Donald Trump’s surprise election victory – his fiscal plans have raised the prospect of tighter monetary policy in the US and pushed up Treasury yields. But domestic factors have also played a role. In particular, signs that the ruling AK Party has gained support to put constitutional amendments that would strengthen the powers of the increasingly authoritarian president to a referendum have spooked investors. Lira weakness adds to the reasons to think inflation will rise in 2017. The central bank has already been forced to hike its policy interest rates and we think further monetary tightening lies in store next year. This comes against the backdrop of an economy that was in a slump prior to the latest market sell-off. Indeed, our Tracker suggests that GDP may have contracted by around 1% y/y in Q3. The consensus view that the Turkish economy will grow by around 3% next year looks far too optimistic.