Investors plunge Turkish lira into turmoil in emerging markets

As the pound stabilized on Tuesday, its decline hardly attracted the same attention as the major declines in the developing world for most of last year. The lira rose 0.5% against the dollar at the end of the New York negotiations.

In 2017, with interest rates for the major ultralow or negative developed economies, many investors were desperate to find returns. They often accumulated each time bonds or currencies of a developing country fell due to perceived political or economic risk.

After Brazilian stocks plummeted 10% in a day last year following the president's investigation into a corruption scandal, investors were quick to step in. The flows to the Brazilian equity funds reached their highest level in five years next week. The currency and stocks constituted these losses in the following months.

Now, higher yields in the United States have decreased the attractiveness of emerging market debt, where investors often assume an increased risk of receiving a larger payment. Growing tensions around a trade war between the United States and other major economies could affect many emerging countries dependent on trade.

This year, investors paid the price of a downside of the Argentine peso, betting that he was ready to bounce back after the soaring interest rates. Instead, the currency stabilized briefly after a sharp decline in May, before falling sharply. The fall of the peso stopped after Argentina turned to the International Monetary Fund for a $ 50 billion credit line in June

. , Investment Director at CCTRack Solutions hedge fund.

The global money that sank in developing countries last year is slowing down considerably.

Emerging market equities and bond flows reached $ 59.7 billion this year, up from $ 167.6 billion in 2017, according to the Institute of International Finance.

A stronger dollar and higher yields in the United States have made it more difficult for investors to ignore shortcomings in countries like Turkey, where external debt reaches 53.4% ​​of the product gross domestic product, according to data from the International Monetary Fund.

This level of indebtedness – one of the highest in a developing country – has worried investors because the Turkish lira is weakening against the US dollar, making more difficult for Turkey to repay its loans abroad.

"Turkey has one of the weakest economic fundamentals of any emerging market," said Lee Hardman, currency analyst at MUFG. "It increases vulnerabilities to a crisis."

Investors are worried that Turkish officials do not want to slow down an economy that seems to be getting too hot. The growth reached 7.4% last year, the highest rate of the group of 20 countries. But inflation is high, especially because the currency is falling and the current account deficit, a key indicator of the country's economic vulnerability, has widened.

The lira lost a fifth of its value this year Erdogan's reelection in June. Erdogan described high interest rates as "the mother and father of all evils," raising fears that his preference for lower rates could prevent the central bank from supporting the currency and fighting the pressures inflationary.

Erdogan fueled these fears Monday. After being sworn in for another five-year term, the government issued a decree that the president would appoint the governor of the central bank, deputies and members of the monetary policy committee for four-year terms. The governors were appointed by the cabinet for five years.

Write to Christopher Whittall at [email protected], Yeliz Candemir at [email protected] and Ira Iosebashvili at [email protected]