I’ll explain the economic war between Türkiye and Greece
Türkiye and Greece: geographically close, economically distant. Analysis by Andrew Rymer, CFA, Senior Strategist, Strategic Research Unit, and Rollo Roscow, Emerging Markets Fund Manager, Schroders
Despite being close geographically, economically the contrast between Greece and Turkey could not be starker.
These are small markets in the context of equity investing in emerging markets globally, but events in these two economies have made headlines over the past decade. Greece has suffered the painful effects of a sovereign debt crisis that has brought it to the brink of exiting the Eurozone. Meanwhile, Turkey, one of the "fragile five," has been on a trajectory of economic deterioration for more than five years.
Today, Greece represents a story of economic recovery supported by long-term structural reforms, while Turkey faces an urgent economic adjustment to avoid an even deeper crisis.
WHERE IS GREECE?
Macroeconomic conditions in Greece are now much more stable, and the decline in energy prices over the past nine months has been supportive. Meanwhile, funding from the European Union, under the Recovery and Resilience Plan, will provide €30.5 billion between 2022 and 2026, split between €17.77 billion in grants and €12.73 billion in euros of loans.
These investments and related reforms focus on delivering more sustainable long-term growth, with significant emphasis on the green and digital transitions. In fact, 37.5% of the plan is dedicated to achieving climate goals, while a further 23.3% is focused on the digital transition. Greece is aiming for Net Zero by 2050. The draft of the National Energy and Climate Plan, published earlier this year and currently under consultation, foresees a significant increase in the production of electricity from renewable sources.
Tourism remains an important driver of growth and is estimated to directly contribute 20% of GDP. About 25% of the workforce is employed in tourism. It is a cyclical sector, but the prospects for this year continue to be encouraging and the country is gaining market share from other European countries. Nominal GDP growth of around 2.6% is forecast for this year.
Last year, Greece exited the EU's 12-year fiscal surveillance under bailout deals. The move has provided the government with greater flexibility in budget spending. The primary surplus target (before interest costs) has been abandoned and fiscal policy can be eased.
The debt-to-GDP ratio remains high, having reached 206% of GDP during the pandemic, although it has now fallen to around 170%. As regards the political plan, it is very probable that the victory of New Democracy in the second round of 25 June will favor the continuation of the reform programme. The guarantee on the political outlook could lead Greece to recover the investment grade debt rating. This result would put the country back in the sights of large institutional investors investing for the long term, allowing for cheaper and more stable financing for future investments.
ON THE OPPOSITE FRONT, TURKEY
In Turkey, long-term economic growth prospects are underpinned by a young and growing population. Its proximity to the Middle Eastern and North African markets, which also offer an opportunity for long-term growth, could also provide attractive export opportunities.
In the medium term, however, Turkey faces significant challenges and we expect economic growth to remain below trend for the next two years or so. This year, GDP growth of 1.9% is expected, supported in part by reconstruction after the severe earthquake at the beginning of the year and by pre-election expenses. However, the high level of foreign currency debt of the corporate sector, especially banks, will need to be restructured and there is a high risk of external debt rollovers.
Although inflation has declined in recent months, it remains unanchored, with a nominal rate close to 40%. The key monetary policy rate now stands at 15%, having been raised from 8.5% under the leadership of the new central bank governor. While a return to more orthodox policy would be welcome, central bank independence has been undermined in recent years and credibility will take time to restore, assuming policy follows a conventional path in the meantime. After the elections, the authorities allowed the lira to depreciate. It was almost inevitable, given that spendable foreign exchange reserves are close to $7 billion, an all-time low. The expected record-breaking tourist season, with inflows of up to 40 billion, should be supportive in the near term. Coupled with some efforts to improve policy, this should buy time for the economy and avert an imminent balance of payments crisis. But there is still a long way to go.
WHAT ARE THE RISKS?
In recent years, Greece's perception of risk has declined significantly. A more controlled fiscal policy has been positive. The return of New Democracy in 2019 has given greater confidence regarding financial sustainability. As a result, the cost of insuring Greek debt has decreased and is now lower than even Italy's. By contrast, the cost of insuring Turkish debt has tripled in the past five years.
Of the two economies, we continue to favor Greece. Economic growth prospects are solid, thanks to support from the EU Recovery Fund, and aggregate market valuations remain attractive.
We maintain a negative view on Turkish equities. Serious imbalances persist in the economy and currency risk is constant. The appointment of a new finance minister and central bank governor brings experience and a more orthodox approach to monetary policy-making. However, the government's lack of credibility, after a series of u-turns in recent years, keeps us cautious. That said, if macroeconomic stability is restored, Turkey offers a number of potential equity opportunities. While the first steps are being taken in Turkey to adjust policies and bring the economy onto a more sustainable footing, significant risks remain. In the meantime, markets will question the longevity of this commitment. On the other side of the Aegean, the prospects are the brightest for over 15 years.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/vi-spiego-la-guerra-economica-fra-turchia-e-grecia/ on Sat, 08 Jul 2023 05:50:26 +0000.