Best Over for Lira Means Better Ahead for Economy: Turkey Credit
Best Over for Lira Means Better Ahead for Economy
Kerem Uzel/Bloomberg
The lira appreciated 0.1 percent yesterday to 1.7670 per dollar, climbing for the first time in six days.
The lira appreciated 0.1 percent yesterday to 1.7670 per dollar, climbing for the first time in six days. Photographer: Kerem Uzel/Bloomberg
The lira’s 6.5 percent rally this year that helped Turkish bonds outperform all emerging-market debt may be approaching an end, supporting analysts’ forecasts that a steadier exchange rate will keep the economy resilient.
The lira, which weakened 18 percent in 2011, will stay flat at best this year based on the average estimate of 1.76 per dollar from 23 banks surveyed by Bloomberg. Royal Bank of Scotland Group Plc, the most accurate in predicting the currency’s moves in the past six quarters in a study by Bloomberg Rankings, says the lira will slide 9.5 percent to 1.95 by year-end. Options trading shows a more than 60 percent probability the currency will hit that level.
Turkey, whose 9.6 percent expansion in the first nine months was the second-fastest among major economies after China, is reassuring investors growth will stay intact this year after policy makers cut the main interest rate to 5.75 percent from as high as 12.5 percent last month. A central bank survey published Feb. 8 foresees the economy rising 3.4 percent in 2012.
“Growth is likely to prove resilient and I may be too pessimistic about my 4 percent target for 2012,” Tim Ash, the head of emerging-market research at RBS in London, said in an e- mailed response to questions. “Turkey has a new found vibrancy and self-confidence, driven by political stability, clean sovereign and bank balance sheets, and demographics.”
Two-Year Yields
Yields (TRABNBM) on Turkey’s two-year debt slid 161 basis points so far this year to 9.40 percent, the biggest decline in the 19 largest emerging markets tracked by Bloomberg.
Economists and traders are betting that Turkey’s central bank will support growth in the $735 billion economy at the expense of lower inflation, which hit 10.5 percent in 2011, the highest in three years. Inflation could be brought down faster with a stronger lira, Erdem Basci, governor of the Central Bank of the Republic of Turkey, said on Jan. 31.
While the central bank’s priority is tackling inflation, policy makers may miss their target of 6.5 percent for this year “by a little,” said Basci, 45.
Prime Minister Recep Tayyip Erdogan, 57, is forecasting the economy, the eighth biggest in Europe and about half the size of Russia’s, will grow at least 4 percent this year. Gross domestic product has expanded an average of 5.9 percent each year since 2002, when Erdogan was first elected, three times the pace in Europe.
Goldman Forecast
Goldman Sachs Group Inc. in New York abandoned predictions for a 2012 recession on Feb. 10 and forecast Turkish growth of 2.5 percent. Frankfurt-based Commerzbank AG is even more optimistic than the government, anticipating a 5 percent expansion this year because export orders from Germany, Turkey’s biggest trading partner, will jump, Tatha Ghose, an emerging- markets economist for the bank in London, said in e-mailed comments.
“Turkey will continue to grow in the short term while accumulating larger imbalances,” said Ahmet Akarli, an economist for the region at Goldman Sachs in London, who predicted the lira will weaken to 1.8 per dollar in six months and 1.85 by the year-end. “There will also be ample accommodation provided by the European Central bank and the recent improvement in global risk appetite.”
Turkey’s central bank’s reserves fell to $75.3 billion on Jan. 20, the lowest level since September 2010, and were at $77 billion on Feb. 3 compared with Russia’s $507.3 billion of foreign exchange and gold reserves, according to the latest central bank data.
Policy makers spent $16 billion between August and January trying to defend the currency as the lira posted the biggest decline in emerging markets last year.
Foreign Investment
Turkey, with the biggest population in Europe after Russia and Germany, depends on foreign direct investment to spur growth because of the nation’s low savings rate, according to Ash. Direct investment from abroad almost doubled on an annual basis in December to $3.1 billion, and for the year was $13.4 billion, almost twice the 2010 level, according to the central bank.
Basci is relying on the capital to help finance the country’s record current account deficit, which expanded to more than 10 percent of economic output in December. The government predicts the deficit will narrow to 8 percent this year and 7.5 percent in 2013.
Rates on the overnight repo, the benchmark source of lending between Turkish banks, slid to the lowest level in four months to 6.6 percent on Feb. 10, in a further sign borrowing costs are coming down and supporting economic growth. They were at 7.5 percent today, down from as high as 11.5 percent three months ago.
Lira Gains
The lira depreciated 0.4 percent today to 1.7745 per dollar, heading for its weakest close this month, a day after it appreciated less than 0.1 percent as the central bank reduced the amount of loans available in one-week repurchase agreements at its lowest 5.75 percent lending rate. Basci adopted a discretionary policy last year of using more than one rate in an attempt to control inflation without slowing the economy.
The cost to insure against non-payment of Turkish debt for five years with credit-default swaps rose five basis point to 270 basis points today, according to data provider CMA, which is owned by CME Group Inc. (CME) and compiles prices quoted by dealers in the privately-negotiated market. The contracts pay the buyer face value in exchange for the underlying securities or cash equivalent if the issuer fails to comply with debt agreements.
Spreads, Volatility
Turkish default swaps cost 19 basis points less than the average for countries in central and eastern Europe, the Middle East and Africa included in the Markit iTraxx SovX CEEMEA Index.
The extra yield investors demand to hold Turkey’s dollar- denominated bonds rather than U.S. Treasuries declined two basis points to 356, according to JPMorgan Chase & Co. (JPM)’s EMBI Global index.
Traders’ expectations of swings in the lira during the next 12 months fell to the lowest since August on Feb. 8, according to the so-called implied volatility on options contracts. Volatility has since remained below levels seen in the past six months.
Slower growth will help the lira appreciate to 1.7 per dollar by the end of the year, said Bank of America Merrill Lynch, the third-most accurate lira forecaster.
“The domestic economy is cooling down and the current account deficit will narrow,” Arko Sen, the bank’s director of debt and foreign-exchange strategy for emerging Europe, the Middle East and Africa in London, said in response to e-mailed questions yesterday.
Floods of Capital
Lira-denominated notes gained 3.4 percent this year, beating average increases of 1.9 percent for JPMorgan’s GBI- Emerging Market Broad index. Bonds fell 0.2 percent in China while Brazilian debt rose 0.3 percent and Russian securities advanced 3 percent, JPMorgan indexes show.
Basci said on Jan. 6 that the lira may outperform other emerging-market currencies this year, helping his fight against inflation, as foreign capital floods into Turkey. “Lira investors in 2012 will gain,” he said.
Futures signal the lira will weaken to 1.825 per dollar by June and 1.893 by the year-end, data compiled by Bloomberg show. Barclays Plc, which was the second-most accurate lira forecaster in the Bloomberg Rankings study, said the currency will drop to 1.85 per dollar at the end of the first half and to 1.80 in December.
Yields on two-year debt probably will rise to 10.3 percent in the second quarter of 2012, according to three economists’ forecasts compiled by Bloomberg.
“We are now less bearish on the lira than we were at the end of last year but still feel rather nervous about endorsing the lira as a good carry trade currency,” said Koon Chow, an emerging-market currency strategist at Barclays in London.
To contact the reporter on this story: Selcuk Gokoluk in Istanbul at sgokoluk@bloomberg.net
To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net
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