Biggest Drop in Lira Yields Stops as Oil Spoils Deficit Cut: Turkey Credit

The rally in Turkish debt that sent yields down the most in emerging markets is starting to falter as rising oil prices revive concern over the biggest current- account deficit after the U.S. and Italy.

Yields on benchmark two-year lira bonds rose for a fourth day today in their longest rising streak since November after sliding as much as 248 basis points this year, the most among the 15 largest developing nations tracked by Bloomberg. The lira, which strengthened 7.8 percent against the dollar in the first seven weeks of this year, fell for the fourth day and headed for the lowest level since Jan. 26.

Turkish bonds had rebounded on speculation that the current-account gap, at a record $77 billion or 10 percent of gross domestic product, would ease as the second-fastest growing major economy slowed. Gains turned to losses as Brent crude hit a three-year high of $128.4 a barrel on March 1. Energy Minister Taner Yildiz said Feb. 28 that every $10 increase in the oil price adds $4 billion to the cost of imports. Turkey is the most exposed to higher fuel costs among all emerging markets, Societe Generale SA said in a Feb. 24 report.

“High oil prices are dangerous for current-account deficit countries like Turkey,” Win Thin, the global head of emerging- market currency strategy at Brown Brothers Harriman in New York, said in e-mailed comments.

Yesterday’s Brent price of $125 a barrel compares with a cost of $110 assumed by the central bank for its economic projections for 2012.

Erdem Basci, 45, governor of the Central Bank of the Republic of Turkey, warned on Feb. 28 that rising global energy prices pose a risk to inflation and the current account.

Deficit Forecast Rises

The current-account gap narrowed for a second month in December to $6.6 billion, the central bank said on Feb. 13. The estimate for this year’s deficit climbed to $62.7 billion from $62 billion, according to a fortnightly central bank survey of economists and business leaders published on Feb. 22. The government is “struggling” to stop higher oil and gas prices being passed on to homes and businesses, Yildiz said in Ankara on Feb. 28 in an interview with CNBC television.

Turkiye Garanti Bankasi AS (GARAN), Turkey’s biggest bank by market value, may increase its forecast for the deficit from $62 billion for 2012, Ali Ihsan Gelberi, chief researcher at the bank in Istanbul, said in e-mailed comments yesterday.

Commerzbank AG will stick to its forecast for a reduction in the deficit to 7.8 percent of GDP as long as oil remains at $130 a barrel or less, Tatha Ghose, a London-based senior emerging market economist, said by e-mail yesterday.

“The oil price risk” means the lira is less attractive than Poland’s zloty, said Thu Lan Nguyen, a Commerzbank currency strategist in Frankfurt, said in a phone interview on March 2.

‘Elevated’ Prices

Societe Generale said yesterday it ended bets on the lira gaining against the Israeli shekel and the Czech koruna, citing the “theme of elevated oil prices” in an e-mailed report by Benoit Anne, a London-based chief emerging-market strategist. Germany’s DZ Bank AG recommended investors sell the lira versus the euro in a March 2 report from Daniel Lenz, its Frankfurt- based chief emerging-market strategist.

Concern about the current-account deficit contributed to an 18 percent slump in the lira last year, the biggest depreciation worldwide, and a 390 basis points, or 3.9 percentage point, advance in two-year bond yields, the largest jump since 2006, according to a Turk Ekonomi Bankasi AS index of the securities.

Index Falls

Turkey isn’t the only emerging market losing ground. The MSCI Emerging Markets Index (MXEF) of shares fell 3.5 percent in the last two days after China cut its economic growth target and euro-area services and manufacturing output shrank by more than estimated in February.

“We are starting to see a correction in most-risk markets right now,” said Thin of Brown Brothers Harriman.

The lira declined 1 percent to 1.7890 at 4:56 p.m. in Istanbul today. Futures signal the exchange rate will weaken to 1.8090 per dollar in April and 1.8285 in June, data compiled by Bloomberg show.

The extra yield for Turkish dollar bonds over similar- maturity U.S. Treasuries rose six basis points to 328 today, compared with an average of 356 basis points for emerging markets, according to JPMorgan Chase & Co.’s EMBI Global index.

Default Swaps

The cost of protecting Turkish bonds against default using five-year credit-default swaps dropped three basis points yesterday to 229, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately- negotiated market. The spread was 183 for Russia, rated three levels higher by Standard & Poor’s, 183 for Poland and 158 for South Africa.

Turkish contracts cost 31 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 swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.

Morgan Stanley & Co said the size of the current-account gap excluding oil is less of a threat to Turkey’s economic stability because exports are rising at a faster pace. The deficit will shrink to $60 billion by December, Tevfik Aksoy, a London-based economist for central and Eastern Europe, Africa and Middle East at Morgan Stanley, said in an e-mailed response to questions yesterday.

Turkey not only risks being hit by higher oil prices but a military conflict over its borders in Iran, said Isik Okte, chief strategist at Halk Invest in Istanbul, the broker owned by Turkish state-run bank Turkiye Halk Bankasi AS (HALKB).

“If America and Israel attack, then just sell Turkey when you find a bid” because inflation and the current account will “go through the roof,” he said.

To contact the reporters 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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