Turkey squeeze might pack less of an emerging markets punch

LONDON (Reuters) - The central bank shake-up might bring more troubled times ahead in Turkish markets, but its diminished importance for investors in developing economies has greatly reduced the risk of contagion across emerging markets, say analysts.

FILE PHOTO: A board shows the currency exchange rates outside an exchange office in Istanbul, Turkey March 22, 2021. REUTERS/Murad Sezer

Turkey’s lira briefly fell 15% to near its all-time low after President Tayyip Erdogan abruptly fired the central bank governor at the weekend and installed a critic of tight policy who is expected to reverse recent rate hikes.

“We see the situation in Turkey as idiosyncratic and do not expect a broad contagion in EM universe, however, some pressures on more vulnerable EM countries like Brazil may appear,” said Yerlan Syzdykov, global head of emerging markets at Amundi Asset Management.

Below are four graphics showing Turkey’s waning position in financial markets:


Turkey has tinkered numerous times with offshore lira markets in recent years. President Recep Tayyip Erdogan frequently accuses foreign speculators of destabilizing the lira.

Investors have been cautious on exposure to the currency, especially after a 2019 offshore lira squeeze saw overnight borrowing rates soar to over 1,000%.

The share of USD/TRY currency pair as a total of FX trading has been on a long decline, slipping to 0.5% in October from 2.3% four years ago, Bank of England data shows. (Graphic: Lira trading on FX markets: Loosing traction, )


Turkey investors have been no strangers to turmoil, though this has prompted many of them to stay on the sidelines.

Prior to the August 2018 currency crisis, foreign investors held more than a fifth of all Turkish government bonds though levels sank to just over 3% in autumn.

Analysts predict the latest turmoil could reverse inflows into the country's fixed income markets seen when Naci Agbal was at the helm of the central bank from early November until last Friday. (Graphic: Foreigners in Turkish bond market, )


Turkey’s weighting in JPMorgan’s EMBIG has gradually decreased over the years, giving the country a lesser role in a key index of dollar-denominated sovereign bonds.

And while Turkey still faces large external vulnerabilities, many major emerging markets have reduced those during the coronavirus crisis, thanks to significant improvements to their current account positions, helping shield them somewhat from the fallout from investor flows.

(Graphic: EMBIG weightings, )


Turkey’s local stock market capitalization in USD averaged just over $215 billion over the last decade compared with a $920 billion average for South Africa, over $1 trillion for Brazil and about $1.6 trillion for India, according to World Bank data.

It also lost two-thirds of its weighting in the MSCI EM stock index over the same period. (Graphic: Turkey's weight on MSCI EM stock index, )

Reporting by Karin Strohecker in London and Rodrigo Campos in New York; additional reporting by Ali Kucukgocmen in Istanbul; editing by Jonathan Oatis