The oil jump rocking Turkey is a red flag for the rest of emerging markets

(Bloomberg) – Turkish markets are throwing warning signs that inflationary pressures are building in the developing world as oil prices soar.

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Despite spending billions of dollars to shield the currency from soaring energy prices last week, the pound extended the third steepest depreciation in emerging markets since Feb. 11. The yield on two-year government notes jumped more than 210 basis points in five days. through Friday, second only to local debt issued by Russia, which now faces sanctions from the United States and its allies.

Admittedly, the selloff was made worse by Turkey’s extraordinarily loose monetary policy which has already stoked consumer prices. But the aggressive price revision shows just how much is at stake for a country that imports almost all of the oil and natural gas it consumes. And it underscores the headwinds that a range of energy-importing economies such as India and South Africa are facing following Russia’s invasion of Ukraine.

Brent crude hit a high of over $105 a barrel on Thursday, a seven-year high. He backtracked on Friday amid reports that President Vladimir Putin is open to peace talks, a move that could help avoid any disruption to oil supplies. Ukrainian authorities will hold talks with their Russian counterparts on the country’s border with Belarus.

“Many emerging economies, like Turkey, are struggling to recover from the pandemic and an oil price shock is making that worse,” said Brendan McKenna, strategist at Wells Fargo in New York. “As the growth outlook deteriorates, inflation spikes and current accounts turn even deeper into deficits, emerging markets FX could come under severe pressure.”

The MSCI Emerging Markets Currency Index posted its first weekly decline in a month, and the second largest this year. It comes as impending rate hikes in the United States threaten to drain capital from the developing world. Traders are now betting on my six quarter-point Federal Reserve hikes this year, starting in March.

‘Triple whammy’

It’s what Witold Bahrke, a Copenhagen-based senior macro strategist at Nordea Investment, describes as a “triple whammy” of higher oil prices, “steep monetary headwinds” and a slowdown in global trade.

India, the Philippines and Thailand stand to lose the most in Asia as a sustained rise in oil inflation slows growth and weakens their currencies, according to Nomura Holdings Inc. Their central banks have signaled they expect to remain accommodative for at least as long as necessary to support growth, which risks pushing up consumer prices.

For Citigroup Inc., the other vulnerable countries are Chile and Hungary, which raised its key rate as expected last week. Deputy Governor Barnabas Virag said inflation risks have “unequivocally increased” since last month and all rate setters support the need to continue the rate hike cycle.

As other emerging markets position themselves to counter price pressures with even more tightening, Turkey’s response has been unconventional – it has cut rates by 500 basis points since September. Instead, the government launched a new type of savings account in December designed to protect lira savings against any foreign currency losses, an attempt to deter local demand for dollars and euros without harming the growth.

Wolfango Piccoli, co-president of Teneo, asserts that each increase of 10 dollars in the price of a barrel of oil costs the country approximately 4 billion dollars of additional imports, widening the deficit of its current account. The shortfall increased for a second month in December as rising energy costs kept Turkey’s trade deficit in check despite a weak lira.

Citigroup holds an underweight pound position in its model portfolio, saying the country’s net energy imports, as a percentage of its economy, are the highest in the developing world after Ukraine. A series of currency routs and Turkey’s unorthodox policies have spooked foreign investors, who hold less than 5% of the bond market in local currency.

Turkey’s next test will come on Thursday, when economists expect consumer prices to accelerate to 52.5% in February, the highest since April 2002. That would lower the real rate – the rate director of the country after removing inflation – at minus 38.50. %, by far the lowest in the world.

“It could be difficult for the government to implement its plans as Turkey faces the risk of another inflationary shock caused by rapidly rising global commodity prices and a weaker lira,” Piotr said. Matys, strategist at InTouch Capital. “It will probably be another difficult chapter.”

This week

Here are some of the most important economic data events to watch this week:

  • China’s official manufacturing PMI likely contracted in February, non-manufacturing sector likely slowed

  • Ukraine’s central bank will likely raise rates by 100 basis points on Thursday, according to Citigroup. Signs of distress in Ukrainian debt markets intensified last week after Russia’s onslaught

  • Malaysia is expected to keep its benchmark rate unchanged on Thursday

    • The Ukraine crisis has increased the risk of a rate hike as early as May, although Bank Negara Malaysia is more likely to act in July, according to Bloomberg Economics

  • Inflation data expected from Indonesia, Peru, Thailand, South Korea and the Philippines. Turkey, India, Hungary and South Korea to release Q4 GDP

  • Mexico’s central bank, which plans to raise interest rates again in March, will release its quarterly inflation report on Wednesday.

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