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Turkey’s tightening may have less impact on emerging markets

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LONDON (Reuters) – The central bank shake up could lead to tougher times in Turkish markets, but its diminishing importance to investors in developing economies has significantly reduced the risk of contagion between emerging markets, according to the reports. analysts.

A table shows the exchange rates outside a bureau de change in Istanbul, Turkey on March 22, 2021. REUTERS / Murad Sezer

The Turkish lira briefly fell 15% to approach its all-time low after President Tayyip Erdogan abruptly sacked the central bank governor over the weekend and installed a critic of the strict policy that is expected to reverse recent ones rate hikes.

We see the situation in Turkey as idiosyncratic and do not expect wide contagion in the emerging market universe, however, pressures on more vulnerable emerging countries like Brazil could emerge, said Yerlan Syzdykov, Global Head of Markets. emerging at Amundi Asset Management.

Here are four charts showing Turkey’s declining position in financial markets:

1 / THE TRADE OF LIRA FADING

Turkey has repeatedly tinkered with the offshore lira markets in recent years. President Recep Tayyip Erdogan frequently accuses foreign speculators of destabilizing the lira.

Investors have been cautious about exposure to the currency, especially after the offshore lira was squeezed in 2019, overnight lending rates soared to over 1000%.

The share of the USD / TRY currency pair in total foreign exchange transactions has been declining for a long time, falling to 0.5% in October from 2.3% four years ago, according to data from the Bank of England.

(Chart: Lira’s trading in the forex markets: loss of traction -)

2 / REDUCTION OF FOREIGN OWNERSHIP

Turkish investors have been no stranger to the unrest, although it has prompted many to sit on the sidelines.

Before the August 2018 currency crisis, foreign investors held more than a fifth of all Turkish government bonds, although levels fell to just over 3% in the fall.

Analysts predict that the latest turmoil could reverse inflows into the country’s fixed income markets seen when Naci Agbal was head of the central bank from early November to last Friday.

(Graphic: foreigners in the Turkish bond market -)

3 / DOLLAR-BONDS LOSE WEIGHT

The weight of turkeys in JPMorgans EMBIG has gradually declined over the years, giving the country a lesser role in a key index of dollar-denominated sovereign bonds.

And although Turkey still faces great external vulnerabilities, many large emerging markets reduced these during the coronavirus crisis, thanks to significant improvements in their current account positions, which has somewhat shielded them from losses. fallout from investor flows.

(Graphic: EMBIG weightings -)

4 / STOCK SLIDE Turkey’s local market capitalization in USD has averaged just over $ 215 billion over the past decade, compared to an average of $ 920 billion for South Africa, more than $ 1 billion. trillion dollars for Brazil and about 1.6 trillion dollars for India, according to World Bank data.

It also lost two-thirds of its weight in the MSCI EM stock index over the same period.

(Graph: weight of Turkey on the MSCI EM stock market index -)

Reporting by Karin Strohecker in London and Rodrigo Campos in New York; additional reporting by Ali Kucukgocmen in Istanbul; edited by Jonathan Oatis

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