Hot emerging market - Turkey

In Turkey the decade of free fiscal policy and high inflation had passed. In recent years the country addresses majority of structural problems and the result is the average annual growth of 6% of GDP between 2002 and 2009.

Of course Turkey failed to defend against global recession. During the first quarter of 2009 GDP fell by 14.3% and unemployment jumped to 16.1%. In August jobless rate reached 15.6%. Turkish lira remained relatively stable despite high current account deficit, at least compared to the previous crisis that arose as a result of high savings of the population in other currencies. Foreign exchange reserves of central bank are at a reasonable level and the banking sector showed that it is not only stable, but in the first half of 2009 showed even record profits.

During crisis many countries were forced to reduce the debt in the financial sector and industry. Countries with low public debt, however, have more room to stimulate economic activity through fiscal policy. Advantages of Turkey lie in a strong banking system untouched by toxic assets and in low public debt (39% of GDP). This enabled the government to implement expansionary policies.

With the renewed growth Turkey has the chance not only to return from the crushing fall back, but have a sustainable and rapid economic growth in comparison with the countries of Europe, the Middle East and Africa.
The reasons are as follows:

1.) Population grows 2.3% annual rate and only 15% of the population are over 60 years. The average age reaches 28 years. This represents a solid foundation for rapid and sustainable economic growth.

2.) Indebtedness of households is still very low. Also, the ratio of bank loans to deposits is 39% which is very low level. Along with a healthy banking system, this represents great potential for growth at a time when confidence is restored.

3.) Paradigm shift. Domestic political scene is stable. Moreover, local markets proved relatively resilient, as well as the Turkish lira was not to much too volatile mainly due to a stronger financial system.

4.) Inflation remains subdued, now at 5.33%. The central bank cut interest rates to historic lows and suggested that maintaining low levels in 2010 and possibly 2011. In 2009, the Turkish government bonds began to trade with the first single figure interest. Scope for further effective measures through structural reforms and privatization are open.

5.) From a geopolitical perspective, Turkey has become an important energy corridor between Russia and the Commonwealth of Independent States (9 of 15 former Soviet Republics) and the Mediterranean.

6.) Low inflation and interest rates will probably remain at these levels in 2010. This situation plays in favor for sectors such as consumer goods and services that are not in the category of daily consumption, real estate market, insurance and banking.

On the other hand, domestic investors lack the courage to invest in stock markets, mainly driven by decade with high fixed income interest. If a low rate environment will last, some of the money from these savings will be transferred to the equity markets, especially in shares with high dividend.
The main risk for the Turkish shares is possible rapid increases in global interest. Then Turkey would adjust the rates to compensate for the risk premium.