Turkey should follow Hungary's path

Just as a cooling credit impulse has begun to feed into a slight moderation in the trade deficit, Turkey is trying to stimulate the credit channel again via a state-sponsored real-estate subsidy. We believe the country would be better off taking the pain of a sharp recession and resetting. This was the route Hungary took in 2011, which ultimately created a massive buying opportunity for Hungarian assets.

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It’s been an interesting summer for emerging markets. The smoking gun has been Turkey, where President Recep Tayyip Erdogan’s creeping autocracy, a debt downgrade and the threat of sanctions from the US in response to the detention of a US national caused a run on the Turkish lira.

We are somewhat alarmed at the extent to which Erdogan refuses to embrace any orthodoxy in his economic policy: having won the presidential election at the end of June, he installed his son-in-law Berat Albayrak as tsar-in-charge of all things economic and financial. Imagine if Jared Kushner was running the US Treasury…!

On August 28, Turkey’s government unveiled its latest crisis-fighting measure: a state-sponsored real-estate subsidy, which allowed for only a 10% deposit and a 10% discount on the sale price of properties. We’re hopeful that this is only a sop to Erdogan’s AKP’s constituency.

However, if there is any take-up, we believe it will only emphasise Turkey’s existing problems by increasing the fiscal burden on the government, stimulate credit (of which we believe there has been far too much growth in recent years) and underpin domestic demand. That is the last thing Turkey needs – the unsustainable external imbalances require a sharp recession and adjustment to allow external deficits to shrink.

Figure 1 shows Turkey’s trade balance as % of GDP, while Figure 2 shows Turkey’s credit impulse and the trade balance (inverted). Just as a cooling credit impulse has begun to feed into a slight moderation in the trade deficit, Erdogan is trying to stimulate the credit channel again. We believe he’d be better off taking the pain of a sharp recession, and resetting. This was the route Hungary took in 2011, which ultimately created a massive buying opportunity for Hungarian assets.

Figure 1. Turkey Trade Balance as % of GDP

Source: Bloomberg; as of end-July 2018.

Figure 2. Turkey’s credit impulse and the trade balance (inverted)

Source: Bloomberg; as of end-July 2018.

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