Investors warned on private debt in Turkey and Thailand

Debt deflation has hit Thailand and is set to hit Turkey

Investors warned on private debt in Turkey and Thailand

Investors in both Turkey and Thailand have been warned that both economies are at risk from high levels of private debt that will ultimately impact their stock markets.

In an exclusive interview with Every Investor, Maarten-Jan Bakkum, senior emerging markets strategist at NN Investment Partners (formerly ING Investment Management) argued that high growth in the level of private debt that supported demand has slowed in Thailand causing debt deflation. It is set to do so in Turkey.

He stated that in Thailand’s case it is purely household debt while in Turkey it is private debt in general, both corporate and household. Turkey’s situation is further complicated because its banking sector is very dependent on foreign capital.

“Thailand’s situation is not that bad but the problem is that growth is very weak and that growth in the economy in the last ten years was primarily driven by household consumption. That has now fallen away because the household sector is deleveraging. For Thailand there are deflationary pressures on the economy as households deleverage, demand will be weak for longer. You see that inflation is low, growth is low, investment is low and politically things are not that stable. The system would like to generate growth but it cannot do it, so this increases the political risk,” said Bakkum.

Although Turkey’s economy does not appear weak, it does have pressures from both sides. Bakkum argues that demand will slow when growth in private debt levels cease to keep increasing. Secondly, it has a particularly weak banking sector that is dependent on capital inflows from abroad, that are now turning negative.

He explained: “Turkey is the most vulnerable as it has not yet started the process of deleveraging. Its credit growth remains at 20%. Meanwhile, it has a current account deficit of 6% of gross domestic product. The worst part is that the Turkish banking sector is mainly financed with foreign capital. Given the recent flight of capital from the emerging world and the great political uncertainty in Turkey, it could well be a lot more difficult for Turkish banks to raise capital. A strong credit correction seems inevitable.”

Bakkum urged investors to be cautious: “Investors should be cautious with markets that have relied heavily on credit in the past decade. With flows to emerging markets likely to remain under pressure, high credit growth is difficult to sustain. For Thailand, there is room for more growth disappointments, which means that earnings growth is unlikely to recover anytime soon. Equity prices should reflect that. In Turkey, the same problem exists, but on top of that the banking system is particularly vulnerable for capital outflows. Also, on a country level, Turkey has large external financing needs. This should keep the currency under pressure to depreciate more.

Learn more

If you’d like to know more about how private debt is more dangerous than public debt, watch this video interview with Professor Steve Keen

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Christopher Menon

Every Investor Editor Chris Menon is a financial journalist who has written regularly for national newspapers, magazines and websites about personal finance, with particular emphasis on investing.