Emerging markets weather the storm hitting Turkey

Fears that the crisis engulfing Turkey could spill over into other emerging markets were allayed by analysts last night.

Despite knee-jerk falls in some eastern European currencies, they said Turkey's problems were political rather than economic, specific to the country and likely to remain contained. Turkey has been plunged into crisis by tensions surrounding its presidential election and threats of a military coup. The country's Constitutional Court yesterday annulled last Friday's first round after the opposition boycotted the vote.

The wife of the ruling AK Party's candidate, Abdullah Gul, wears a headscarf - one of the most potent symbols of Islam. Pro-secularism supporters, including the army, feared the century-old separation of religion and state in Turkey would be undermined if Mr Gul was elected. The government could now propose a different candidate, but may call a snap general election and postpone the presidential poll.

"Because this is an issue that is fundamentally Turkish and political, it should not be widely detrimental to other countries," said Juliet Sampson, emerging markets chief economist at HSBC. "It is not clear that the impact will be widespread unless it triggers a wider assessment of emerging market risk, which is possible but not probable. If it turned from a political to an economic crisis, there could be cause for concern, but there is no reason to believe that that is going to happen."

Neil Shearing, emerging Europe economist at Capital Economics, agreed. "Our feeling is that this a Turkey-specific risk," he said. "It's difficult to see how it could feed across to Latin America, for example. Other emerging market economies, such as Brazil or India, don't have a huge amount of exposure to Turkey."

As police fired tear gas and clashed with protesters marking May Day in Istanbul, Turkey's financial markets suffered a fresh drubbing. The country's benchmark share index, the ISE National 100, plunged 3.2 per cent after falling by 4 per cent on Monday. The lira weakened by another 1 per cent to 1.3787 per dollar, taking its two-day losses to 3.3 per cent. Yields on lira-denominated government debt rose by 11 basis points to 19.25 per cent. Before this week's decline, stocks had added 20 per cent since the start of the year, and the lira was up 6 per cent. Emerging market currencies including the Polish zloty and the Hungarian forint also slid.

The losses came as Citigroup slashed its recommendations on Turkish stocks to underweight from overweight, citing the probability of prolonged political unrest and less attractive valuations. It said a weak currency and bond market would probably deter many investors, making it harder for the stock market to rebound. "The lira looks vulnerable and bond yields are likely to remain high, constraining upside for the equity market even if political tensions ease," Citigroup analysts Andrew Howell and Geoffrey Dennis said in a note to investors. Others said Turkey's political instability could hurt its bid to join the European Union.

The ratings agency Standard & Poor's said the tensions were unlikely to have an immediate impact on the country's credit rating of BB-minus, three notches below investment grade. "The current political crisis may have longer-term implications for Turkey's creditworthiness, however, in the event that it results in an interruption in, or reversal of, prudent economic policy," it added.

Mr Shearing said Turkey's medium-term growth prospects depended on the future pace of reforms, which in turn depended on whether parliamentary elections returned a strong, reform-minded government.