Bloomberg Businessweek

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 REMARKS Bloomberg Businessweek August 20, 2018

value of your currency, raising your borrowing costs, and

pulling out their hot-money investments. There’s no senti-

ment on a trading desk.

South Korea learned this lesson, if anything, too well. Once

a borrower, it’s become one of the world’s biggest savers since

it got a scare during the Asianinancial crisis. The country

has a surplus on its current account—the broadest measure

of trade in goods and services and investment income—equal

to 5 percent of GDP. The problem with so much saving is that

South Korea, like Germany, isn’t buying its fair share of the

world’s goods and services. Instead, it’s keeping its own citi-

zens employed in the export sector.

Turkey is at the opposite end of the spectrum from South

Korea. In this year’s irst quarter it ran a current-account dei-

cit equal to 6.3 percent of GDP. That trade balance measure

has been in the red every quarter but one since the end of

2002. In other words, Turkey has been borrowing and spend-
      ing beyond its means, running up a tab that’s now coming due.
      Bloomberg Economics rates Turkey the most vulnera-
      ble of 19 emerging-market economies based on four equally
      weighted criteria: the current-account balance, external
      debt as a share of GDP, government efectiveness, and inla-
      tion. “No other country has quite the same combination of
      weak and deteriorating fundamentals, as well as a govern-
      ment sprinting away from economic orthodoxy,” writes Tom
      Orlik, chief economist of Bloomberg Economics. The next
      four most vulnerable among the big emerging-market nations
      are Argentina, Colombia, South Africa, and Mexico.
      The second lesson from this minicrisis is that U.S. behavior
      continues to matter. As bad as Erdogan’s leadership has been,
      it took a Trump tweet to turn very bad into disastrous for
      Turkey. The lira fell 18 percent the day of his tarif announce-
      ment. The tweet was something of a gift to Erdogan, because
      it added weight to his claim that Turkey was the victim of hos-
      tile outside forces (page 32).
      Trump’s tweet rattled markets because U.S. presidents
      have sought to calm market turmoil in the past, whereas
      Trump intensiied it. What’s more, his justiication for the
      tarifs was both murky and disconcerting. Many investors

Under Pressure

Percentage change in currency vs. dollar

since Dec. 29, 2017

To protect their currencies, emerging-market nations often have to raise

interest rates or cut government spending.

assumed the tariffs were intended to add pressure on

Erdogan to release an American evangelical pastor, Andrew

Brunson, from house arrest, since Trump had just fin-

ished sanctioning two Turkish government ministers over

the afair. Other investors speculated that the tarifs were

intended to ofset the pricing advantage Turkey was getting

from a cheaper currency, because in his tweet, Trump noted

that “their currency, the Turkish Lira, slides rapidly down-

ward against our very strong Dollar!” Either of those justii-

cations could run afoul of the World Trade Organization, of

which the U.S. is a founding member. Twelve hours after the

tweet, the White House stated, somewhat implausibly, that

the real reason for the tarifs was to boost national security

by protecting U.S. steel and aluminum producers—without

explaining why they had been applied only to Turkey and

not bigger sources of metal imports.

The American who has the most sway over emerging mar-

kets may not be Trump but Federal Reserve Chairman Jerome

Powell. The Fed is raising interest rates to prevent inlationary

overheating in the U.S. That pushes up interest rates all over

the world, as companies and governments compete for lim-

ited funds. On May 8, Powell said that the Fed wasn’t primar-

ily responsible for global lows of capital and that emerging

markets were well-positioned to navigate the U.S. rate hikes.

Still, if an emerging-markets crisis gets bad enough, Powell’s

Fed could dial back on rate hikes on the grounds that it may

curtail U.S. growth.

Turkey is likely to remain a thorn in the paw of the world

economy for some time to come. That’s because, of the two

lessons of this crisis, Erdogan is ignoring the irst one, about

the need for sound economic management, and Trump is

ignoring the second, about prudent U.S. leadership. The two

heads of state, who as recently as July appeared to be best

buddies, are at loggerheads. It looks like a replay of Trump’s

relationship with Chinese President Xi Jinping, another

authoritarian whom Trump both admires and is infuriated by.

Contagion, if it occurs, could happen through defaults

that damage banks in lending nations. Spain’s Banca

Bilbao Vizcaya Argentaria, Italy’s UniCredit, and France’s

○ Philippine peso ○ Indian rupee ○ Brazilian real ○ Indonesian rupiah ○ Mexican peso ○ South African rand