This article is part three of a series examining parallels between BRIC countries (Brazil, Russia, India, China) and the "emerging markets" of the MINT community (Mexico, Indonesia, Nigeria, and Turkey). This article looks at the currency volatility currently plaguing Turkey and how it parallels the economic trends of Brazil.
The Silk Road is back, says the BBC, and it runs through Turkey. As the country is a central hub of aviation as well as an important member in transporting Asian fuels to Europe, initial assessments would agree with this statement. Numbers would support this idea as well; the Turkish state has enjoyed positive annual GDP growth almost consistently since 2002 (excepting a small hiccup in 2009).
This positive growth has come at a price. Turkey's recent growth has only come at the cost of increased borrowing. With a trade deficit of 7.5%, this increased borrowing is little different from any other developing economy. Unfortunately for Turkey, this strategy was sustainable only as long as the main invested currency, the U.S. dollar, was comparatively cheap.
As money has become progressively tighter in recent quarters, Turkey's spending may be catching up with the country. Coupled with the U.S. taper, potential streams of investment are drying up, causing growth to slow as businesses attempt to pay back loans taken on in U.S. dollars.
Add in the ongoing political instability regarding Prime Minister Erdogan, mounting deficits, and an average inflation rate of 8% (well above the 5% GDP growth rate), and the Turkish economy is showing all the signs of a ready-to-burst financial bubble.
Devaluation of the Turkish lira against the U.S. dollar only makes the point clearer. Despite a light surge this week after Turkey's latest attempt at intervention, the dollar has trended strongly against the lira for the last four years, increasing in value by over 30%.
Brazil: Been there, done that?
Turkey seems to walk in the footsteps of Brazil. Like Turkey, Brazil boomed with the assistance cheap money loans. Unlike Turkey, loans came from China, making Brazil's position in the early 2000s somewhat more vulnerable than U.S.-driven Turkey, although the end result is the same. With the country not enjoying the same central hub position of Turkey, Brazilian annual GDP growth has managed to stay positive, at times only barely.
While Brazilian balance of trade has largely been a surplus in the last decade, Brazil's economy has lost ground as investment streams from China (and to a lesser extent, the U.S.) have dried in recent years. Chinese investments have dropped off and forced the Brazilian Central Bank to struggle with inflation rates averaging 6% per annum.
With all attempts to combat inflation failing, the government turned to tax cuts and stimulus packages, which did nothing but carve into government revenues. The consistent and relatively rapid devaluation of the Brazilian Real against both the U.S. dollar and Chinese yuan increased debt further and point to Brazil as a financial bubble that has hit critical mass.
Is Turkey walking the Silk Road or a dirt path?
Turkey has two things that Brazil has never possessed: a strong historic relationship with its major investment partner (U.S.), and a prime position to regulate energy flows to neighboring states. While the former can wax and wane, the other should always give the opportunity for Turkey to be a strong economy. This strong economy has not manifested.
Brazil and Turkey are very different economies in nearly every sense of the word, but one way they are very similar is in the investment streams both have taken on to fund their market expansions. In both cases, this has led to a similar set of consequences: over-dependence on foreign streams as a crutch against financial shortfalls.
With the reduction of foreign investment, Turkey will fall into the same financial pit occupied by Brazil. Brazil already has a weakening currency and slowly ballooning inflation rate that will overtake GDP growth in the future. Turkey is little better, despite having a more prime economic position.
The two countries are not on the exact same path, but the difference is slight. Turkey really only has one chance to get back to a smoother market. Politics must be reined in to allow for effective economic reform to be pushed through to combat inflation rates. Failure to do so will condemn Turkey to the same anemic growth currently condemning Brazil.
The other parts in the series: