5 reasons why foreign investors are worried about Turkey

 - This is the translation of the article that appeared on WSJ.com.tr on 8/22/2013

1) Reel rates of Turkey’s 10 year yields are par with US: Turkey’s 10 year government bond yield is trading around 9.85%. The inflation rate was announced as 8.88% in July. So the real return of the Turkey’s bonds are around 97 basis points.

At the same time 10 Year US Treasury yields are at 2.94% and the latest July inflation has risen by 20 basis points from previous month to 2 percent in July. That puts the real return of US 10 year treasury’ at 94 basis points.

And adding the fact that you can cash out US treasuries anywhere in the world without running into a liquidity problem, the yields on Turkish bonds are not attractive.

2) Currency risk: The recent sell of Turkish lira makes investing in Turkish assets quite risky. Turkish lira has slumped 3.3 percent in the month of August and lost almost 12 percent against US Dollar since January. The situation was even uglier against Euro which lira lost over 14 percent this year.

This quick drop in Turkish lira deepens the loss sustained by foreign investors  in Istanbul’s stock exchange which had lost 12 percent this year. Stock market is now in bear territory losing 26 percent from record levels seen in May.

For foreign speculators holding assets in Turkish lira erases good chunk of the any profits they might have and worsens the damage they sustain.

3) Regional political risks: As Turkey’s southern neighbour Syria is dwelling with ever growing internal conflict and the Egypt situation getting more messy and the latest car bomb explosions in Hizbullah controlled areas of Lebanon, the situation in Middle East has become quite complicated.

Moreover, Turkish government is very vocal and has been involved in all the conflicts in the region which makes the country the most exposed to the dangers. Prime Minister Recep Tayyip Erdogan’s latest remarks blaming Israel for the military takeover in Egpyt is not helping Turkey either.

4) Unclear monetary policies of Turkey’s Central Bank: TCB said it won’t be holding forex auctions on days announced as extraordinary. However this week the bank announced that until further notice everyday will be extraordinary and it will sell at least 100 million worth of FX. Such sharp changes as well as insisting on orthodox monetary policy of not altering interest rate confuses investors.

Although TCB has increased the lending rate by 50 basis points to 7,75%, it stills refuses to use conventional strategy to increase interest rate. In today’s piece on WSJ by Emre Peker and Kerim Karakaya, a poll shows almost all the economist think TCB should return to conventional policies but economists also say TCB won’t.

The confusing and ever changing policies of the central bank, turn off  investors.

5) The wind has changed for Emerging Markets: Even before the chatter about Fed’s tapering began, emerging markets have already started to lose steam. China’s sluggish growth rate of 7.5 percent in the 2^nd and India’s terrible growth rate of 4.8 percent in the 1^st quarter summarizes the broader story with these countries. Turkey who benefited most from the capital flowing to EMs will likely to get hurt most when the outflow fastens.