Rising borrowing costs: Turkey, the only large emerging market of concern

Developing economies including Turkey faces a mounting financial crisis as foreign investors have been pulling funds out of emerging markets for five straight months, according to a report by the Institute of International Finance (IIF).

Outflows by international investors in emerging market stocks and domestic bonds reached $10.5 billion in July, taking total outflows in the past five months to over $38 billion, the longest period of net outflows since records began in 2005.

Investors have also pulled $30 billion so far this year from emerging markets foreign currency bond funds, which invest in bonds issued on capital markets in advanced economies, according to data from JPMorgan.

Rising borrowing costs

While Sri Lanka has defaulted on its sovereign debt and Bangladesh and Pakistan have both approached the International Monetary Fund (IMF) for help in the past three months, many developing countries are suffering from depreciating currencies and rising borrowing costs, further driven by rate rises by the US Federal Reserve and fears of recession in big advanced economies.

As the borrowing costs for large emerging markets such as Brazil, Mexico, India and South Africa have risen less sharply, and many economies acted early to fight inflation and put policies in place that protect them from external shocks, the only large emerging market of concern is Turkey, says the Financial Times.

"Government measures to support the lira while refusing to raise interest rates -in effect, promising to pay local depositors the currency depreciation cost of sticking with the currency- have a high fiscal cost," it adds.

Citing emerging markets economist Adam Wolfe, it goes on to note that such measures can only work while Turkey runs a current account surplus, which is not the current case.

Wolf says conclusively: "If it needs external finance, eventually those systems are going to break down."