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Tiniest Deficit as Growth Stalls Gives Bonds Push

Slumping growth dragged down by weaker demand at home helped drive Turkey’s current-account deficit to the lowest in three years, helping bondholders while giving policy makers more reasons to cut interest rates.

Yields on benchmark two-year notes fell five basis points to 7.59 percent yesterday, extending the biggest drop in major emerging markets this year, after the central bank said the deficit fell for the 10th straight month to $1.2 billion in August. Turkey’s local-currency bonds have returned 13 percent this year compared with 9 percent for Russia, according to JPMorgan Chase & Co. indexes.

The current-account gap, which shrank more than all seven economists’ estimates in a Bloomberg survey, may put more pressure on central bank Governor Erdem Basci to reduce borrowing costs. It followed a statistics office report two days earlier that showed industrial output fell in August and the government said it would miss its year-end growth target of 4 percent.

“The current-account figures now will reinforce a growth- focused monetary policy,” Ali Cakiroglu, an investment strategist at HSBC Asset Management in Istanbul, said in e- mailed comments yesterday. “We expect cuts of at least 50 basis points to the upper end of the rate corridor next week.”

Domestic Demand

The narrowing deficit reflects Basci’s efforts to temper domestic demand with a dual-rates policy. He reduced average bank borrowing costs to 5.75 percent on Oct. 4, the floor of his interest-rate corridor and the lowest level in 11 months, after he cut the upper end of the rate band by 150 basis points to 10 percent last month to foster economic expansion. The balance of payments data for August showed imports dropped the most since January, falling by almost $2 billion to $18 billion.

The effective rate of funding to banks has dropped 236 basis points, or 2.36 percentage points, in the past two months. The decrease hasn’t been matched in lending rates, with the cost of consumer loans falling 130 basis points to 16.5 percent in the period. Business loan costs dropped 120 basis points to 13.3 percent, according to a Bloomberg index tracking Turkish credit.

Economy Minister Zafer Caglayan, backed by Prime Minister Recep Tayyip Erdogan, has called for cheaper borrowing to stimulate the economy, with Caglayan saying Basci has kept rates too high for too long.

Business Loans

“It’s impossible for a small business to take out a loan at the current rates, run a business and pay it back,” Caglayan was quoted by the state-run Anatolia news agency as saying yesterday at a conference in Ankara. “There are no profits that high.”

The improved current-account deficit will “add to the justification for a limited 50 basis-point cut” at the top end of the corridor as Basci tries to coax banks into lending more, Ibrahim Aksoy, an economist at Seker Securities in Istanbul, said in an e-mailed report yesterday.

Brokerages BGC Partners and Oyak Securities both cut their estimates for the year-end current-account deficit to $60 billion in the past month, which would be a decrease of about 22 percent from last year’s record high of $77.1 billion as Turkey’s China-like expansion was also driving a record jump in loans and imports.

“Is it sustainable?” Margarete Strasser, a fund manager at Pioneer Investments in Vienna, said by e-mail yesterday. “The current-account deficit is shrinking but still very high, and when global markets get more risk-averse again, Turkey is one of the countries with high vulnerability.”

Default Swaps

Five-year credit-default swaps on Turkey were unchanged 155 today. That compares with 144 basis points for Russian swaps, 113 for Brazil’s and 143 for Israel’s. The contracts pay the buyer face value in exchange for the underlying securities or cash equivalent should a government or company fail to adhere to its debt agreements. Rising prices show deteriorating perceptions of a borrower’s creditworthiness.

The extra yield investors demand to hold Turkey’s dollar- denominated bonds over U.S. Treasuries fell two basis points to 216 today, according to JPMorgan’s EMBI Global Index.

The lira depreciated less than 0.1 percent to 1.8074 per dollar at 9:50 a.m. in Istanbul, taking its gain this year to 4.6 percent. The two basis-point drop in two-year bond yields to 7.57 percent today extended their decline this year to 344 basis points.

The yield on Turkey’s two-year local currency notes dropped to 44 basis points lower than two-year Brazilian debt today. That compares with May 18, when the yield on Turkish debt was 171 basis points higher than Brazil’s. Brazil and Turkey offer investors the highest yields on their two-year debt among 18 emerging markets tracked by Bloomberg.

The current-account “is a positive surprise,” Jens Thellesen, who helps manage $1.5 billion at Jyske Bank A/S (JYSK) in Silkeborg, Denmark, said in e-mailed comments about the deficit yesterday. “The central bank will probably be more dovish, which should be positive for bondholders.”

To contact the reporter on this story: Benjamin Harvey in Istanbul at bharvey11@bloomberg.net

To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net

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