Source: Bloomberg

Turkey is still running a US$36 billion ca deficit, or 4%-5% of GDP, and financing most of it with carry-trade deposits in the banking system, as Al-Monitor reported this week:

Mahfi Egilmez, a prominent economist, has calculated that in the first half of 2017, of the foreign currency pouring into Turkey, 78% was hot money and the remainder 22% was foreign direct investment. Hot money comes in as Turkey provides safe returns for foreign investors and the interest rates are high. Hence, those who have a large amount of cash can make quite a bit of money, which in the short term may prove to be a success for the Turkish economy.

With TRY 1-week deposit rates at 12.4%, the combination of the 8% appreciation of the lira (same as the decline in DXY) this year has made the lira carry trade exceptionally attractive: That’s unlevered returns YTD of about 16% for TRY positions financed with USD.

This has made it possible for Turkey to run a high rate of bank lending growth as well as fairly high GDP growth (5.5% YOY).

Source: Bloomberg

Presuming that the dollar continues to weaken (and I think it will) Turkey will be able to perpetuate this state of affairs for some months, but the trade has reached its use-by date.

I don’t share the enthusiasm for EM in general expressed by Bank of America and some of the other equity strategists. The carry trade markets seem in general quite vulnerable.