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Friday, 20 October 2017

Turkey 2008

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So much fuss has been made of the political issues raging around Turkey in recent years that it is easy to forget its financial markets. The question of Turkish membership of the EU has received more column inches throughout Europe and Turkey than many other issues put together. More recently, the question of how far Turkey’s secular traditions should be respected has been equally explosive.

Interest in the situation extends far and wide, Turkey being the country the US holds up as an example of the kind of democratic, secular but Islamic state it wishes to see proliferate throughout the region. But with a moderate Islamic party holding the reigns of power in the country, some are concerned its secular tradition are being eroded.

Almost everyone agrees, however, that the AKP party has delivered stronger than expected performance in the economic sphere, and even the most sceptical and fiercely secular bankers have had to admit the government has been a safe pair of hands, especially when compared to governments Turkey has had in the past.

But the markets have provided almost as many surprises as the politics – both good and bad. This year has not been easy for anyone, and emerging markets have finally started getting the hammering some thought they might have escaped when they were outperforming Europe and the US in 2007. Turkey has found it especially hard: a country with few commodity riches of its own, it cannot fall back on high oil prices to make up for falling FDI and chaos in the credit markets.

This year has seen nosedives in both the equity market and in the value of the Turkish lira, both of which have been among the worst performers in the region. In both instances the falls can be at least partly justified by the markets going into the year on the back of a strong run, in which values had been driven up beyond fair value. In effect they have just overshot their downward corrections, and there is no reason to believe this freefall will continue.

The bond markets have fared better. Turkish sovereign issuance, denominated in dollars and euros, has been well received. Corporates have been a little less ambitious but there is hope for more activity there too.

But perhaps the most exciting prospect is the government’s plan to sell off most of its infrastructure assets. This is expected to keep the loan market lively for the foreseeable future, while improving services will help lift the overall economy. There has been some debate about the way these privatisations have been handled, and whether enough is being done to stimulate competition, rather than simply selling at the highest price. Yet despite these concerns the financial community has been unanimous in the view that the government is moving in the right direction.

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