Turkey vulnerable to bird flu

LONDON – Solid risk appetite among global investors should shield Turkish assets from the immediate impact of a deadly outbreak of bird flu, but Turkey remains highly vulnerable to shifts in investor sentiment if things get worse. Investments and the economy could take a hit if tourism suffers as a result of health fears in Turkey, where there has been a sudden burst of cases of avian influenza among humans, with 14 confirmed so far including the death of three children. Economic imbalances, particularly a current account deficit amounting to nearly 6 percent of gross national product, could come under greater scrutiny if vital portfolio inflows start to dry up. «It has the potential to become quite serious, depending on how long it stretches out,» said Sonal Desai, senior emerging market economist at Dresdner Kleinwort Wasserstein in Milan. Investors showed only a mild reaction yesterday to the outbreak, in part because local markets, including the bourse, were closed for the start of this week’s feast of the sacrifice religious holiday. The lira was trading at 1.3350 to the dollar, slightly below Friday’s close, and UBS said some profit-taking may be in the cards. Turkey’s benchmark dollar-denominated bond was slightly weaker. For the most part, analysts reckon that Turkey’s improving economy and a global hunger for higher-yielding emerging market assets should see it through the crisis – a least for now. «Right now the appetite is pretty strong, so I’m sure there is more patience from the market to see what will happen in Turkey,» said Pierre Yves Bareau, head of emerging markets at Fortis Investments in Paris. He noted, however, the rapid spread of the flu, and said, «I’m sure people will remain quite vigilant and look at the potential impact.» Risks There are plenty of risks. Highest among them may be the threat to tourism and with it the inflow of foreign currency that Turkey needs to keep its current accounts under control and the lira from its previous tendency to decline. Tourism accounts for 5.3 percent of Turkish GNP and is projected at $18 billion (14.87 billion euros) this year and $20 billion (16.53 billion euros) in 2007. To date, the bird flu outbreak has hit mainly areas in the east of the country, far from the main tourist resorts, but authorities said yesterday that 23 people were under observation in Istanbul, a key tourism destination. The high season is some way off, but many foreigners make their holiday plans at this time of year and an extended crisis or a major exacerbation could put visitors off. In a similar vein, Turkey’s economy has become increasingly boosted by foreign direct investment (FDI), triggered in part by privatizations, the adoption of International Monetary Fund reforms and Turkey’s European Union candidacy. Last year was a relatively good one for FDI in Turkey – perhaps more than 5 billion euros – but previously the country has failed to meet its potential. United Nations data ranked Turkey at 106 out of 140 countries in FDI in 2003 and said it should have been at 72 in theory. Sarah Hewin, a senior economist at American Express Bank, suggests the bird flu outbreak, if extended, may give foreign investors pause for thought. «If it becomes a serious epidemic, there could be an impact on foreign direct investment decisions this year,» she said. Limited The key is indeed likely to be how bad the outbreak gets. Investment banks have been warning their clients for some time, for example, that the world at large risks serious economic disruption if the flu jumps to a human-to-human strain. But there is no sign of that at the moment and the World Health Organization said yesterday that there was nothing to indicate that the spread of infection in Turkey came from anything other than birds. The economic and market impact in other countries has been limited. Thailand’s stock market, for example, has managed gains of more than 9 percent over the past 12 months, despite some 14 deaths in the country due to bird flu. That leaves some investors expecting minimal impact if any on Turkey from the current outbreak. «(Bird flu) had no lasting impact on bond premia (in Asia). Without a huge acceleration, I don’t think this would have an impact on either bond or equity markets,» said Michael Discher, senior portfolio manager with PIMCO Europe. Emerging markets are nonetheless nearly always more vulnerable to shocks than are more established countries, suggesting that Turkish assets could be in for a period of enhanced scrutiny. «For (emerging market) countries every bad news… could spill over into more awareness for investors of what the problems are,» said Irina Topa-Serry, emerging market investment strategist at AXA Investment Managers.

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