Emerging Markets

Political tensions allow the lira to slump further

The dollar/lira currency pair climbed over the TRY 5.00 mark for the first time yesterday evening – and remained on this trajectory this morning. The lira currently continues to mark new record lows against the common European currency, too. Since the start of the year, the Turkish currency has depreciated by more than 22% against the euro and by as much as 25% against the greenback. The Argentinian peso was the only other noteworthy currency to underperform even more. The lack of resolve by the Turkish central bank and the related, legitimate doubts about its political independence remain the key reason behind the weakness of the Turkish currency. However, the latest slump was due to the escalation of the diplomatic differences that prevail between Turkey and the US. The US administration is demanding the immediate release of the US pastor Andrew Brunson and yesterday imposed sanctions against two Turkish ministers…

Turkey: Current lack of positive perceptions

Among the larger emerging markets, hardly any is as greatly reliant on a benevolent risk perception by markets as Turkey. Faced with a chronic current account deficit and high share of short-term foreign liabilities, the country has to rely strongly on external financing. A distinct lack of currency reserves can also be noted. The alternative to a favourable risk assessment is – so to speak – an increase in refinancing costs. In recent weeks, a number of factors have put a damper on the risk perception of Turkey. This trend was precipitated by strained diplomatic relations over the independence efforts recently voiced by the (Iraqi) Kurds or the dispute between Washington and Ankara after both sides had stopped granting visas. Remarks of the rating agency S&P didn’t help much either. The agency issued a commentary identifying the new „Fragile Five“, i.e. countries likely to be especially vulnerable in conditions of…

Globalisation cannot be just – but creates more prosperity

Globalisation – no other topic has been discussed as fiercely and emotionally. The debate tends to hinge on two questions: Can globalisation be just? And: Does globalisation improve our prosperity? The honest answer to the first question is: No. And the answer to the second question is: Yes. So why is that the case? The gap in prosperity between the emerging markets and the industrialised countries has significantly closed in a relatively short period of time. This trend has been driven by well above-average growth in the emerging markets. Growth was, in turn, triggered by strong wage differences and a corresponding relocation of labour-intensive processes from the industrial countries into the emerging markets, with the emerging markets’ business model being strongly export-driven and less dependent on the domestic economy. While the emerging markets got such a boost from the shift of certain work processes from the industrialised nations, this had…

China is groaning under the weight of its debt burden – but still shuns reform

China’s debt level has increased dramatically since the financial crisis in 2008/2009 and is now one of the highest worldwide. The inflated housing market, the shadow banking sector which has seen strong growth and numerous state-owned “zombie” companies present considerable risks and render the country vulnerable. Beijing is sustaining a vicious circle of efficiency loss, slowdown in growth and ever-increasing debt. There is a growing risk that these imbalances will culminate in a crisis at some point. However, due to the central government’s immense financial power, a systemic financial crisis should be preventable. Continued low economic growth, on the other hand, seems unavoidable. The International Monetary Fund (IMF) and the Bank for International Settlements (BIS) are above all concerned about the strong momentum behind debt accumulation in China. They draw alarming parallels between its development and that of other countries which have recently experienced a financial crisis, such as Spain…

Path clear for a referendum on constitutional reform in Turkey

The Turkish lira started 2017 in exceptionally weak form and, with a loss of a good 9% against the euro, revealed the weakest performance of all the world’s major currencies. The lira is currently marking historic lows against both the euro and the US dollar. The prospect of the American Federal Reserve tightening its policy did not exactly help the Turkish currency either. However, the present weakness is currently being driven primarily by domestic factors. Not only is President Erdogan adopting a heavy-handed approach to dealing with his political opponents since last summer’s attempted coup, but governance measures, the uncertainty accompanying these as well as conflicts with radical groups regularly flaring up within Turkey have now left a visible mark. This extends both to the country’s economic performance as well as to its economic prospects. The central bank is also a part of this, having until now only reluctantly adopted…

Brisk consumer spending drives robust growth in Germany in 2016

In 2016, the German economy continued on its robust growth track. With a real increase of 1.9 percent, the economic output actually scored the strongest growth since 2011. Private consumer spending and public consumption expenditure rose appreciably, as they had in 2015, laying the basis for macroeconomic growth. Private households’ zest for consumer spending was supported again in 2016 first and foremost by favourable labour market trends. Gainful employment climbed sharply, and is now at a new record, while at the same time the unemployment rate in 2016 fell to a new low. As a result, as in recent years employees’ income surged. In real terms, private consumer spending in 2016 rose +2.0 percent and thus as strongly as in 2015. In this context, in the past year two “one-time effects” helped boost private consumer spending and public consumption expenditure. The low price of oil braked energy prices and the…