Turkey “more vulnerable than China”

Hagia Sophia IstambulTurkey is at risk of introducing capital controls because its debts make it “more vulnerable than China”, which has suffered a stock market rout in recent days, says new research.

Turkey’s gross external debt has doubled from its pre-crisis level to $400 billion in the first quarter, equivalent to roughly half its GDP, says Fay Ren, investment analyst at Cerno Capital, a London-based asset manager. In contrast, China’s debt-to-GDP ratio is 9%.

The situation is especially troubling, says Ren, because US interest rate rises are likely to rise.

“This will make funding more expensive and debt more difficult to repay, thus making Turkey more vulnerable to capital flight, taking into consideration that almost 25% of their bonds are held by foreigners. These eventualities are often precursors to the introduction of the foreign investors nemesis – capital controls.”

Some factors may help Turkey. A net commodity importer, Turkey should be assisted by falling commodity prices. Also, of the major emerging market economies, Turkey is the least exposed to China, which accounts for less than 1% of its exports, says Ren.

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