ONE consequence of the Greek debt crisis has been a re-ordering of global risk sentiment. The problems plaguing the economies of southern Europe, including Greece and Spain, have brought into sharp relief the budget deficits burdening Western economies such as the UK, the US and Europe, where growth is expected to remain sluggish and interest rates low in the medium term.
In contrast, some emerging economies face lower debt burdens and growth continues to recover strongly. More importantly, for the foreign exchange markets, inflation is beginning to rear its head and many emerging economies are thinking about tightening interest rates later this year.
This is the case for Turkey. Inflation in January surged to 8.19 per cent, significantly above the 6.5 per cent inflation target set by the central bank for this year. The yield on Turkey’s two-year government bond is only 6.85 per cent, which means that bond holders are actually receiving a negative interest rate if you subtract the inflation rate from the bond’s rate of interest: “Significant tightening, is, in other words, right around the corner,” points out Mads Koefoed, market strategist for Saxo Bank.
Since foreign exchange markets are sensitive to changes in interest rates, and tend to rise when rates move higher, this should be positive for the lira, especially against the euro in the coming months.
According to strategists at investment bank BNP Paribas, there are three forces currently driving the foreign exchange markets: debt divergence; relative interest rate differentials; and worries concerning the european monetary union. On all of these points, Turkey looks healthier than the Eurozone economies.
The Turkish economy is recovering, and GDP expanded by more than two per cent in the fourth quarter of last year. On top of that, Turkish banks did not need bailing out and they managed to avoid the worst of the excesses that have plagued their Western peers during the last two years.
This has protected Turkey’s public finances, which look in fairly good shape compared to some developed economies. The government, led by Prime Minister Recep Tayyip Erdogan, took major steps to repair its financial position during the noughties, ironically when governments in the West failed to save for a rainy day. Public debt in 2009 is estimated to be 43 per cent of GDP – this compares with nearly 70 per cent for the UK and nearly 65 per cent in the US. The reward for fiscal prudence has been multiple upgrades to Turkey’s sovereign credit rating by agency Standard & Poor’s in recent months.
The lira has appreciated by 8 per cent against the euro since the start of this year, and there could be further upside to come. Saxo Bank proposes a short euro long Turkish lira trade, to benefit not only from a higher interest rate in Turkey but also the ongoing problems within the Eurozone.
Most forex providers sell lira to retail investors. Although the spread you pay on the trade is relatively wide, profits can be large. Troubles in Europe can be Turkish delight for investors.