August 16 (SeeNews) - The tumble of Turkish markets, caused by a significant drop in the local currency, is having a manageable affect on the region of Central and Eastern Europe (CEE), Austria's Erste Group said on Thursday.
The Turkish currency, the lira, has lost nearly half of its value since the beginning of the year, causing a moderate weakening of the CEE currencies, Erste said in a research paper.
The CEE economies in focus are Croatia, the Czech Republic, Hungary, Poland, Romania, Serbia, Slovakia and Slovenia.
Erste explained that additional, slight weakening could be expected if the Turkish situation deteriorates further, however, even this would be manageable.
In addition, Erste noted, if Turkish problems eased in the near future, CEE markets would benefit.
Exports to Turkey from the CEE range from 1.0% to 4.0% of total exports (and just 0.4% to 1.3% of GDP), which is minimal compared to the often one-fifth to one-fourth ratio of German exports to GDP.
Additionally, the lender noted, CEE does not compare fundamentally to Turkey, with countries in the region mostly boasting a current account surplus, falling net external debt and low single-digit inflation.
The banking group said that Turkey needs hard currency to finance its redemptions of external debt falling due, and the deficit in the current account. However, for investors to provide the necessary funding for this purpose, interest rates need to be lucrative enough.
Prior to negative news from Turkey, Erste said the country's market was already suffering given that the funding cost of the US dollar was going up, amid the tightening of the monetary policy of the US Fed.
"The recent Turkish developments in this environment were effectively oil poured on fire", Erste explained. "The central bank of Turkey was reluctant to increase the interest rate in this environment, which unnerved investors and, ironically, the markets started demanding more interest rate hikes after they saw the central bank’s earlier inactivity".
Also very importantly, Erste concluded, Turkey's relations with the United States deteriorated as well, culminating in a drastic increase in tariffs imposed on Turkish steel and aluminium products, which added a lot of pressure.