Perhaps, MINT is not that mint after all

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Wen Nan Tan's picture

Turkey’s fate today is a reminder to sceptics that ancient Greek mythology still has a place in our everyday lives. When the Trojans pulled the large gleaming wooden horse into the inner walls of Troy, little did they know they had effectively paved the route to their own demise. A millennium later, Troy, or modern day Turkey is again under siege.


The effects of September 11 and a rapidly declining economy in Europe crippled growth in western economies. With the traditional economic powerhouses in shambles, it was time for a paradigm shift towards developing countries. Brazil, Russia, India and China (BRIC) were singled out as diamonds in the rough and touted to be the engines of future global economic growth.


All things must pass; nothing lasts forever. Specifically in the case of BRIC, the party ended within a decade. After years of unprecedented progress, their economic output and growth rates started to decelerate. Widening current accounts deficits, corruption, domestic market failures and the pervasive effects of the 2008 financial crisis plagued their economies. The lag continued to worsen as BRIC began to register numbers increasingly divergent from the peak experienced during their heyday. It became clear that the tides had turned, Jim O’Neill was no Nostradamus and BRIC had hit a wall.


Now that the economies were slowing, investors were eager to shift their focus and money away from BRIC. It was not too long before a new promising group of frontier markets came into the game. Mexico, Indonesia, Nigeria and Turkey (MINT) were poised to be the next economic giants. But what exactly is so special about these four countries? Why are they the markets du jour? And most pressingly, why did recent developments in the financial markets seem to suggest that perhaps, MINT is not that mint after all? 


MINT economies are strategically located for world trade; Mexico with the US and Latin America at its doorsteps, Indonesia being situated in the hub of the fastest growing region in the world and Turkey sitting on the crossroads between the East and West. While the jury is still out for Nigeria, it is without a doubt in the cradle of the nascent African economy.


As developed countries grapple with the effects of ageing population, this is a non-issue for the MINTs. On the contrary, MINT boost one of the youngest economies in the world. While productivity (often benchmarked against literacy rates) may be comparatively lower in frontier economies, they boast a burgeoning share of working population. In short, labour is readily available. And without the drag of an ageing population, more resources can be focused on developing the quality of their workforce and growing their economies. 


Mexico, Indonesia and Nigeria have yet another set of aces up their sleeve - Commodities. Not only do they each possess a large pool of natural resources, they are the leading commodity producers in the world. With oil and coal key components in mass production, these countries are set up to be vast exporters of both raw and finished goods. Although traditional market leaders in commodities consumption are experiencing some draft, MINT economies themselves boost a rising socioeconomic segment of middle-class and affluent consumers (MAC). Specifically in Indonesia, the spending on goods and services, homes and vehicles are gaining so much traction that domestic demand is fast outstripping supply.


If the combination of the above-mentioned tri-factors of growth is not convincing enough, MINT have the backing of statistics to boot. In 2012, the Gross Domestic Product (GDP) of Mexico, Indonesia and Turkey were ranked top 20 in the world, trailing closely behind the BRICs. And it is expected that by 2050, the MINTs will all be part of this exclusive league table. While they are hardly trailblazers, it is definitely still a promising sign of their growth potential.


Now that the foundations are laid, it would seem that MINT economies are set to propel through the global economy. Unfortunately, the ebb and flow of business took over even before their engines warmed. Months after a promising case was first made for the induction of MINT, all momentum came to a standstill, the gears reversed and a regression ensued.


The main draw of investing in emerging markets hinged on the availability of cheap money. Quantitative Easing (QE) had for many years flooded hot money into capital markets. Relaxed credit constraints encouraged and compelled investors to relocate their investments as yields on safe assets were forced down. Speculative capital started flowing into emerging markets, as they were the only segment in the global economy that offered such coveted rates of returns. 


However, investor confidence took a massive hit when news of tapering by the Federal Reserve (Fed) became official. The reduction of credit availability cut investors’ risk appetite and forced them to re-evaluate their investment choices. With tighter credit control, investors quivered at the slightest uncertainty. This resulted in a dramatic outflow  of foreign investments away from emerging markets.


The waning confidence was also reflected on the stock markets, with billions of dollars withdrawn from emerging markets equity funds. The negative feedback loop further intensified when Janet Yellen announced the Fed’s intentions to continue into another phase of tapering, even as news of emerging markets turmoil grabbed headlines all over the world.


In the attempt to preserve their attractiveness and prevent the continued flight of capital, emerging markets hiked interest rates. However, it was too late. The perceived nonchalance exhibited by the Fed and general scepticism about the effectiveness of tightening monetary policies by central banks dominated general market sentiments. Foreign capital continued to drain from the financial systems of emerging markets.  


While the contagion spread across multiple countries, the effects were particularly apparent for Turkey. This was because Turkey’s success depended heavily on the availability of hot money from QE. Although speculative foreign capital inflows widened Turkey’s external deficit, it kept the Turkish economic growth buoyant as well.


Sustaining an economic growth on hot money caused Turkey to tread on dangerous levels of inflation. So much so that at one point, the economy was on the brink of overheating. In addition, the increasing reliance on cheap foreign credit became so unhealthy that the reversal of foreign capital inflows threatened to pose a huge challenge to the stability of the economy. Therefore, when tapering began, capital flows scrambled out of Turkey into safer havens. Expansion reprieved as businesses struggled to repay their debts. With its main engine of growth fleeing the country, Turkey’s economy headed towards turmoil.


Unlike the other central banks that raised interest rates to prevent capital outflows, the Turkish Central Bank was adamant on keeping interest rates flat. In an unconventional response to the crisis, Recep Tayyip Erdogan decided to, instead, burn through Turkey’s foreign reserves to prop up the plummeting Lira. Investors were perturbed by his course of action as it contravened the much-accepted economic logic of tightening monetary policies.


To Erdogan, this move served an underlying purpose. It sent out a strong message – the Turkish government would not give in to the pandering of an “interest rate lobby” by foreign investors. The message was received loud and clear as flights of foreign capital continued to exit the heavy-handed government state.


To make matters worse, political instability stemming from an untimely high-level graft case further alarmed investors. Various factions within the government were formed, and in a bid to tighten his grip amidst the chaos, Erdogan fired half his cabinet and reigned in control over important government institutions.


At this point, investors were disillusioned at the Turkish government’s inept handling of the situation. Cracks on the Turkish financial and political systems began to appear. More specifically, there were serious doubts on the sustainability of Turkey’s growth, and the capabilities of the government to push through reforms to support these developments. These negative sentiments culminated to more investors abandoning ship. The massive flights of foreign investments routed the Lira, sending it into a tailspin and threatening to sink the once buoyant Turkish economy.


Like the Trojans who trustingly believed that the wooden horse was a parting gift from the Achaeans, the Turks were complacent enough to assume loyalty from foreign investors. Ultimately, Turkey’s success story hinged on the influx of hot money. And hot money pledges no loyalty; it regularly flows between financial markets to seek out highest returns.


At a time where investor confidence was already hanging by a thread, the combination of indecisiveness and stubbornness about the right course of action and above all, complacency, was Turkey’s Achilles’ heel. A millennium after the Trojans invited the enemy into Troy, the Turks have yet again paved their route to self-destruction.