On October 11, the Turkish government announced that its national budget deficit for next year will fall vastly below expectations. Instead of 45 billion liras, officials see a shortfall of only 34 billion liras – or about $24 billion.
It’s just the latest in a string of positive data releases for Turkey. And it’s why Turkey’s currency, the lira, has appreciated by 4% since October of last year. But can it continue?
In a word, yes.
While still considered a developing nation, Turkey has built itself into a global competitor. And even as other developing nations are starting to falter, the Turkish economy continues to churn ahead.
Part of Turkey’s renaissance has been due to major reforms it has made to gain EU membership. In addition to cultural changes, it kicked off effective reforms in the corporate and institutional sectors. The government privatized major companies in the technology, banking and retail sectors, helping boost direct foreign investment.
Once built on a foundation of textiles, Turkey has recently expanded into the production of exported cars and electronics. This has helped feed an economy that has grown at an average rate of 6.75% over the last seven years – and projections are for Turkey to expand by almost 8% this year. That makes Turkey’s growth visibly higher than most major European nations, not to mention the United States, which is only showing 2% growth this year.
With high growth rates come higher interest rates. The Central Bank of the Republic of Turkey is like any other central bank – it wants to maintain price stability and economic development while protecting against inflation. So, as prices rise on skyrocketing Turkish growth, its central bankers will have to raise interest rates. Higher interest rates essentially raise the cost of money – hopefully dampening the demand for it.
Of course, higher interest rates also attract foreign investment as fund managers seek out higher yields. With prospects of higher interest rates, yields on two-year bonds are offering 7.70%. To put that in perspective, similarly structured European notes offer a mere 0.80%, while US bonds yield a record low 0.37%.
Turkish stocks are benefiting, too. The benchmark ISE National 100 share index has rallied almost 30% this year. And it looks as if there’s more to come. A midyear review of the index showed that Turkish companies were valued at a simple 10-10.5 times earnings – lagging multiples for other emerging markets by almost 30%. In other words, Turkish stocks still have room to rise.
So far, there is no sign of that slowing down. Templeton Asset Management Ltd., an investment fund led by Mark Mobius, has put huge sums in the country’s stocks. And US private equity funds are seeking out assets to acquire. Dogan Yayin Holdings AS, a Turkish media company valued at $2 billion, is accepting bids from no less than four global investment funds. And more companies like Dogan Yayin are expected to accept foreign offers if the deal does go through.
Of course, not everything is going to go straight up. We can expect a bit of a pullback in Turkish assets. But the longer-term trend continues to look very good. As long as the economy continues to expand and prospects remain good, the Turkish lira is going to be the primary beneficiary – especially against the US dollar.
By Richard Lee