Headlines around the world are flashing serious concern over recent developments in Turkey. How can a country that has its total market capitalisation of companies listed on the stock exchange worth less than Netflix cause such panic and havoc?

President Erdogan was only recently “re-elected” where he has a mandate for a fresh 5 year term and has taken new powers. He has slowly but surely dismantled the democracy Ataturk created 95 years ago, and instead created his own version with immense power and control. Earlier this year there was a reshuffle of 356 judges and prosecutors which saw some key appointments given to party faithful. More recently, Erdogan appointed his son-in-law as Finance Minister, and has since taken away any independence their central bank may have had. This might be ok in isolation, but the problem is markets are global…

Turkey is heavily in debt, with around $220b outstanding for Turkish companies and banks. The debt has been issued in USD, and US interest rates have been rising, also causing the US dollar to strengthen. Foreign investors have been taking money out of the country, which involves selling Turkish Lira and buying Euros or USD. This all puts pressure on the currency. A recent spat with President Trump has centred around a Turkish preacher seeking immunity in the US, and an American Pastor locked in a Turkish jail. Trump is not in the mood to negotiate, and instead doubles the steel tariff to 50%, and aluminium to 20%. This instils even more panic in an economy with an inflation rate of 16%, and the Turkish Lira sinks 30% in a 2 week period.

The headlines are now suggesting this set of events may trigger the next emerging market crisis – similar to the Asian Crisis of 1997. The South African Rand and Argentine Peso are already under pressure, so we now have to wait and see.