Odd couple

In a recent report, the Organization for Economic Cooperation and Development singled out Argentina and Turkey as troubled emerging markets “struggling to recover from recession” and contributing to slowing global GDP growth. In both countries, the OECD observes, “inflation has shot up” as a result of steep devaluations, bucking international trends.

Though seemingly strange bedfellows, it was little surprise to see Argentina and Turkey coupled in the report. While there is no direct link between Ankara and Buenos Aires, there are multiple channels that cause these two economies to experience similarly timed movements.

Historically, Argentina and Turkey have often experienced similar kinds of economic malaise: high inflation, high indebtedness in foreign currency, high budget deficits and large current account deficits. The last major crises both countries experienced were in 2001, when they devalued their currencies and endured economic depressions. In both cases, the turmoil prompted the emergence of populist leaders, Néstor Kirchner in Argentina and Recep Tayyip Erdogan in Turkey.

Last year, both countries witnessed severe financial instability, as chronic economic vulnerabilities and rising U.S. interest rates made markets skeptical of their ability to repay foreign debt. In the years prior, Argentina and Turkey saw large increases in their current account deficits, financed by billions in dollar loans. The inflow of capital led to overvalued currencies, which reduced export competitiveness and increased imports. Furthermore, both countries were beset by political uncertainty, giving investors good reason to worry about their repayment capacity.

Given their unexpected similarities, economic tumult in one of these countries can raise fears among investors about the other one, leading to rapid asset sales – an example of the so-called contagion effect.

There are differences too, of course.

For one, Turkey has uneven relations with the United States. In August 2018, for example, the Trump administration imposed sanctions on Turkish steel and aluminum, raising import tariffs by 50 and 20 percent respectively, and worsening Turkey’s already dire economic situation. By contrast, under President Mauricio Macri, Argentina has reaped the benefits of a close relationship with President Donald Trump, who last year helped Argentina secure a $56 billion bailout from the International Monetary Fund, its largest loan in history.

Moreover, the two countries have adopted decidedly distinct policy responses to recent economic troubles. In Turkey, Mr. Erdogan adopted a strong fiscal stimulus and bullied the central bank into interest rate cuts. For his part, Mr. Macri has imposed harsh fiscal austerity, while his more independent central bank has maintained sky-high interest rates.

Nevertheless, for investors at least, the countries appear to remain psychologically twined. Given the Turkish unpredictability, that has created another vulnerability for Argentina.

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LAP