As the focus turns to Spain, Turkey prepares for more growth
As the Focus in Europe Turns to Spain, Turkey Prepares for More Growth
The European debt crisis is well into its third year and counting, leaving many to suggest that the more appropriate word be “conundrum”, since the urgency of the situation is more ongoing than sudden. Greece, Ireland and Portugal have received bailout funds, but the recent focus has been on Spain, with Italy waiting in the shadows and generating still more uncertainty. Contagion, the imminent fear a few years back, is now a reality, but how far will its tentacles spread?
Less has been written about the financial impacts on countries peripheral to the European Union. Nations to the east and south have had to ratchet back growth plans due to decreased trade estimates for their neighbors to the north and west. Many of these countries have emerging economies that have prospered over the past decade, but now must deal with issues out of their control. The nations with the best prospects tend to be ones with material oil reserves, but there is one exception to this rule, and it is Turkey.
Positioned on the cultural crossroads between East and West, Turkey has a long history of acting independently and not taking either side. As a result, the nation is blessed with a generous entrepreneurial class that has taken the local economy, once in shambles a decade ago, to one bristling with envious GDP growth, reaching 9.2% and 8.5% levels in 2010 and 2011, respectively. Government officials are forecasting an upward bound of 5% for 2012, but the IMF and World Bank have more cautious estimates in the 2.5% to 3.3% range.
The best “barometer “ of a nation’s economic health can often be the pricing behavior of its currency in the global marketplace. The chart below provides a few insights:
The Turkish Lira for the past year is represented by the “Blue” line in the above diagram. A typical USD TRY chart may reverse the order of the two currencies, but the order above helps to demonstrate the obvious correlations in the data. Our global marketplace today is more interconnected than ever before, and this modern reality is no more apparent than when comparing pricing data from our various financial markets. A few insights follow:
• Stocks tend to be more volatile than currencies, but the two different mediums seem to “dance” to the same tune, “mirroring” each other in the process. The companies in these stock indexes are global in nature, with material revenues derived from outside their home countries;
• In the first half of this period, the Lira was influenced more by the market reaction to emerging economies around the world. In February it began to replicate the Euro trend and outperform other emerging stock results. Emerging economies have had the winning formula for the past ten years, outdistancing more developed counties in growth four times over, but investment capital flows have recently reversed, causing respective currencies to weaken over time.
The burgeoning recession in Europe, however, has a more demonstrable effect on its nearby trading partners. Many question whether the problems in Spain could migrate to Turkey. Yes, both nations are dealing with deficits, inflation, and high unemployment, but Turkey is expanding on the growth side. The debt to GDP ratio in Spain is 80%, but in Turkey it is half that figure, below 40%, and therein lays the true difference. The interest rate on long-term Spanish bonds has escalated above 6% and has approached 7%, an unsustainable level if growth and tax revenues are absent.
Spain may be grabbing the headlines of late, but Turkey has favorable growth dynamics.
TOM CLEVELAND (Guest writer)
About the author: Tom Cleveland has had an extensive career in the international payments industry with over 30 years of experience in executive management, corporate governance and business development. Mr. Cleveland earned an engineering degree from Georgia Institute of Technology and did graduate work in Finance at Georgia State University. Currently, Tom writes for ForexTraders.com and offers a lot of insight by expressing his ever-growing investment knowledge.