The biggest selloff in emerging- market debt since 2008 is hitting Turkey hardest as unrest in the Middle East threatens to widen the country’s current-account deficit and boost inflation.
The nation’s foreign-currency bonds have dropped 7.9 percent since the end of October, leading a slide in developing- nation debt, according to JPMorgan Chase & Co. Government securities in lira lost 10 percent for dollar-based investors in the period as the currency touched an eight-month low. Credit- default swaps on Turkey jumped to 174 basis points from 133, the biggest advance among 16 emerging markets, CMA prices show.
Political turmoil from Libya to Oman is lifting the cost of oil imports and curbing demand from a region that buys about 27 percent of Turkey’s exports. The January trade gap was 78 percent wider than the median estimate in a Bloomberg survey of economists, government data showed yesterday. Interest-rate cuts since December aimed at narrowing the shortfall by depreciating the lira have dented the appeal of fixed-income assets on concern inflation may jump from a record low.
“Rising oil prices could hit oil importers like Turkey pretty hard, and the country is dependent on portfolio inflows to finance the current-account deficit,” Kevin Daly, who helps oversee about $6 billion as an emerging-market money manager at Aberdeen Asset Management Plc in London, said in a Feb. 25 phone interview. “So when you’re running somewhat of a questionable monetary policy and investors are concerned about the downside risks, it’s a tricky situation.”
Turkey’s lira bonds fell today, sending the yield on two- year debt up 17 basis points to 8.95 percent, the highest level since May 31, according to the RBS Istanbul Benchmark Bond Index. The ISE National 100 Index of shares sank 4.2 percent, the most in nine months. The lira weakened 0.8 percent against the dollar for the biggest decline among major emerging-market currencies at 10:54 a.m. in New York.
Turkey’s international bonds have pared gains after surging as much as 102 percent since October 2008 on economic expansion rivaling China’s and credit-rating upgrades from Moody’s Investors Service and Standard & Poor’s. Turkey, which needed about $53 billion in aid from the International Monetary Fund from 1999 to 2008 to finance budget deficits that swelled to more than 20 percent of gross domestic product, is rated Ba2 at Moody’s and BB at S&P, two levels below investment grade.
The selloff has dragged the lira down 11 percent against the dollar since October for the worst decline among emerging- market currencies and lifted yields on Turkey’s international bonds to 5.81 percent from 4.53 percent on Oct. 29, JPMorgan’s EMBI+ Index shows. Borrowing costs are now the highest relative to the emerging-market average since August, according to monthly data compiled by New York-based JPMorgan.
Yields on Turkey’s two-year lira bonds have climbed 132 basis points, or 1.32 percentage points, during the past four months to the highest versus Russia’s two-year ruble debt since June, according to data compiled by Royal Bank of Scotland Group Plc and Bloomberg.
Credit default swaps linked to Turkey, which imports 93 percent of its oil, are trading at the highest since April relative to Russia, the world’s largest energy exporter, and reached an nine-month peak versus the Markit iTraxx SOVX CEEMEA Index of swaps for emerging Europe, the Middle East and Africa.
The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should the government fail to adhere to its debt agreements.
“Turkey seems set to be significantly impacted by the current crisis,” Tim Ash, head of emerging-market research at RBS in London, said in an e-mailed note on Feb. 22. Turkey credit default swaps will probably keep widening relative to Russia, Ash said.
Trade Gap Widens
Protests across the Middle East that toppled governments in Tunisia and Egypt have raised perceptions of political risk in developing nations while record food prices and Brent crude’s rally to as much as $119.79 a barrel heighten concern that inflation will quicken. The decline in global emerging-market bonds followed a record $53 billion of inflows into mutual funds that buy the securities last year, data compiled by Cambridge, Massachusetts-based research firm EPFR Global show.
While countries including Brazil, Russia, India and China lifted borrowing costs this year to curb inflation, Turkey’s central bank unexpectedly lowered its benchmark interest rate to an all-time low of 6.25 percent on Jan. 20 and left the rate unchanged after a Feb. 15 policy meeting.
Central bank Governor Durmus Yilmaz’s strategy aims to curb inflows of so-called hot money and weaken the lira, making imported goods less attractive and exporters more competitive. With inflation at a record low 4.9 percent annual rate in January, Yilmaz is betting that higher bank reserve requirements will be enough to cool an economy the IMF estimates expanded more than 8 percent last year, the fastest pace since 2005.
“There are already some signs of a slowdown in credit growth and the bank expects that to become clearer as the year goes on,” said Haluk Burumcekci, chief economist at EFG Istanbul Securities. “As far as the current account is concerned, the bank had already predicted a widening and, given oil prices, it may argue that just holding it flat is an achievement.”
Turkey’s trade deficit rose to $7.3 billion in January from a revised $3.9 billion a year earlier, the Ankara-based state statistics institute said on its website yesterday. The gap followed a record $8.7 billion in December and topped the $4.1 billion median estimate of six analysts in a Bloomberg survey.
The ratio of Turkey’s current-account deficit to GDP jumps 0.6 percentage point with every $10 increase in crude prices, Finance Minister Mehmet Simsek said on Feb. 23. The shortfall will probably amount to 5.4 percent of GDP this year, the widest among the 10 biggest emerging economies, the IMF estimated in October.
Surging oil prices have created a “brand new scenario” that’s likely to change the central bank’s inflation forecasts, Yilmaz said on Feb. 25. A $10 increase in the price of oil may add about 0.4 percentage point to Turkish inflation, the central bank chief told businessmen in the western city of Manisa in a televised speech.
Inflation may climb to 7.5 percent by midyear from 4.7 percent this month as import costs rise, Yarkin Cebeci, JPMorgan’s Istanbul-based economist, wrote in a Feb. 25 report.
The ISE National 100 Index has tumbled 18 percent from its record high on Nov. 9 as unrest in the Middle East reduced earnings prospects for Turkish companies operating in the region.
Tekfen, Turkish Airlines
Tekfen Holding AS, the Istanbul-based company with construction projects in Libya, has $140 million in unfinished contracted work that it suspended last month amid escalating violence in the oil-producing country. The shares have tumbled 17 percent this year.
Turk Hava Yollari AO, the carrier that gets about 18 percent of its revenue from the Middle East and North Africa, has lost 17 percent in Istanbul trading. Turkey evacuated more than 5,000 people in 72 hours using the airport in Tripoli, Libya’s capital, Foreign Minister Ahmet Davutoglu said Feb. 23.
“Regional political tensions and their upward influence on oil prices are only going to add to pressure on the country’s deficit,” said David Spegel, the global head of emerging-market strategy at ING Financial Markets in New York. “We look for better opportunities elsewhere among emerging markets.”
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