Itaú BBA - The crisis in Turkey and its impact on Latin America

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The crisis in Turkey and its impact on Latin America

agosto 24, 2018

Turkish economy to decelerate without policy change, but limited effects on EM

For the version with all charts and tables, please open the attached pdf file 
 

Turkey is facing a crisis in its balance of payments, clearly lacking U.S. dollars to finance its wide current account deficit (the largest among its emerging market peers). Meanwhile, domestic fundamentals deteriorate, with rising inflation and a loose fiscal policy. This is taking place as President Erdogan concentrates more power after re-election.

To correct these issues and restore monetary policy credibility, the central bank should hike interest rates aggressively (700 bps, according to our estimates), while the government should pursue a conservative fiscal stance. However, the administration has not expressed any intention to correct its macro policy, and thus the economy will likely decelerate sharply to correct these problems.

The impact of the slowdown on the global economy seems moderate, given Turkey’s low relative weight. Still, Europe will bear the blunt of the deceleration, considering the trade and banking relations between these regions. As for emerging markets, direct contagion is limited, but indirect contagion may become more relevant if financial frailty in Europe becomes more intense.

Notwithstanding Latin America’s low trade exposure to Turkey, countries that are potentially vulnerable to tightening external financial conditions, such as Brazil and Argentina, are more likely to be contaminated by the crisis. However, even these countries are markedly distinguished from Turkey in some aspects. 


Bernardo Dutra
Julia Gottlieb
João Pedro Resende


 

For the version with all charts and tables, please open the attached pdf file

 



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