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Lira Rally Shows Turkey Growth Catching Up to China

The Turkish Lira
The Turkish Lira "E9" currency (Turk Lirasi), sit in a bundle of 10 lira notes and one lira coins in Istanbul, on Jan. 10, 2009. Photographer: Kerem Uzel/Bloomberg

The Turkish lira, which trailed emerging market currencies from the Brazilian real to the Russian ruble last year, is attracting bullish recommendations after first-quarter economic growth approached that of China.

Barclays Capital, Societe Generale SA and UniCredit SpA say the lira will rise against the dollar in 2010, with forecasts ranging from 6 percent to 12 percent. The lira has gained 3.1 percent in April, the best performance among 26 emerging market currencies tracked by Bloomberg.

“The lira’s kicked in because of the economic rebound in Turkey, which we see as stronger than other countries in the region,” said Christian Keller, chief economist for emerging Europe at Barclays Capital in London, who estimates the currency will rise to 1.40 per dollar from 1.4825 on April 23. “We recommend investors buy on any weakness.”

Turkey is recovering from its deepest recession as tensions between Prime Minister Recep Tayyip Erdogan and the army ease after the February arrest of officers who allegedly plotted to overthrow the government. The central bank says it may raise interest rates, luring investors to the country’s assets. Stocks in Istanbul rose to a record this month and investors have pushed yields on two-year bonds to all-time lows.

The lira, the world’s least valuable currency as recently as 2004, has risen on 20 of 27 trading days since March 18, when the central bank said it “won’t hesitate” to increase the benchmark borrowing rate if prices increase faster than expected. The lira climbed 0.4 percent to 1.4765 at 5:35 p.m. in Istanbul, the biggest gain in nine days.

10% Growth

The central bank cut rates 13 times since October 2008 to a record 6.5 percent. Inflation accelerated to 9.6 percent in March from a three-decade low of 5.1 percent in October.

Turkey’s gross domestic product may have expanded at an annual rate of more than 10 percent in the first quarter after growing 6 percent in the last three months of 2009, Deputy Prime Minister Ali Babacan said April 2. Among the world’s 20 biggest economies, only China is growing faster at 11.9 percent. Babacan’s predictions are “realistic,” said Yarkin Cebeci, an economist at JPMorgan Chase & Co. in Istanbul.

The International Monetary Fund increased its forecast for Turkish growth this year to 5.2 percent from 3.7 percent, saying April 21 that the economy “has already recovered from the initial external shock” of the global financial crisis and capital flows and trade are returning to normal. Turkey’s economy shrank 14.7 percent in the first quarter of last year, the deepest contraction since quarterly records began in 1995.

Turkey ‘Decoupled’

“The economy has decoupled from the region and the central bank does not have a problem with a stronger currency, unlike Poland and eventually, I believe, Hungary,” Gyula Toth, emerging markets strategist at UniCredit in Vienna, said April 21. The bank is “the only one in the region that may raise interest rates as inflation is ticking up.”

Toth estimates the lira will strengthen to 1.35 per dollar this year.

The lira’s 9.4 percent gain over the past year trailed the 20 percent surge in the Brazilian real, the 17 percent rally in the South African rand and the 15 percent advance in the Polish zloty. Only Mexico’s peso underperformed the lira among major emerging market currencies, rising 7.6 percent.

Poland’s currency fell the most in two months on April 19 as the government supported central bank attempts to stall the zloty’s appreciation. The bank on April 9 bought foreign currency to weaken the zloty for the first time in 12 years.

Turkey’s central bank has no target for the lira, Governor Durmus Yilmaz said April 20 during a meeting in Ankara.

The lira reached a high of 1.15 per dollar in January 2008, then tumbled as much as 36 percent to 1.79 as the demise of Bear Stearns Cos. and Lehman Brothers Holdings Inc. roiled global markets.

Easing Tensions

Investors should buy the lira, and sell the rand and forint, because the Turkish currency is undervalued and may rise to as much as 1.30 per dollar this year, said Murat Toprak, emerging market currency strategist at Societe Generale in London, in an April 15 interview. Toprak first recommended the lira on Feb. 25, when he forecast it would reach 1.45.

Scores of army officers, members of an institution legally defined as the defender of the secular constitution, were detained in February on charges related to an alleged 2003 plot to overthrow Erdogan, suspected by opponents of seeking to strengthen the role of religion in society. Tensions have eased since a Feb. 26 meeting between Erdogan and General Ilker Basbug, the country’s military chief.

‘Risk Appetite’

Some investors are too bullish on the lira because political risks may increase as the government seeks approval of constitutional changes limiting the power of judges who’ve objected to Erdogan’s policies, including a move to ease curbs on the Islamic-style headscarf, said Inan Demir, chief economist at Finansbank AS in Istanbul.

The government doesn’t have a two-thirds majority in Parliament, meaning the amendments may be put to a referendum. Erdogan may bring elections forward if the main opposition Republican People’s Party seeks to block the referendum in court and judges concur, Demir said in an interview.

“For the lira to strengthen to 1.40 levels the central bank has to tighten a lot or the risk appetite should get very strong,” Demir, who estimates the lira will fall to 1.53 to the dollar by year-end, said in an April 21 interview. “We don’t have this as our base-case scenario.”

Citigroup Inc. estimates the lira will drop to 1.51 per dollar, “given the combination of low real interest rates, an historically very strong exchange rate in real terms, and rising external financing requirements,” it said in an April 19 report from analysts including Jeremy Hale, head of macro strategy.

Credit Ratings Raised

Fitch Ratings in December lifted Turkey’s debt rating two levels to BB+, one step below investment grade, citing the growing economy and strength of the banking industry. None of Turkey’s banks required a bailout during the financial crisis. Moody’s Investors Service raised Turkey to Ba2, two ranks below investment grade, in January, and Standard & Poor’s boosted its rating one step to the equivalent BB in February.

Rising confidence in Turkish assets meant the government was able to sell 10-year lira-denominated bonds in January, the longest-maturity fixed-rate debt in the country’s history. The Treasury sold 10-year inflation-linked bonds in liras for the first time last month.

Hyundai Motor Co., South Korea’s largest carmaker, is among foreign companies increasing their investments in Turkey. Hyundai plans to spend $75 million on its plant in northwestern Turkey and increase its workforce by 500 to 2,500 to make the i20 compact, the company’s press office said April 21.

Lira Turnaround

Rising prospects for the lira mark a turnaround for the once-beleaguered currency that was introduced by the Ottoman Sultanate in 1844 and devalued repeatedly over the past 100 years as Turkey struggled to align itself with Europe.

The lira depreciated in the 1970s and 1990s, when annual inflation reached more than 130 percent. A financial crisis in 2001 forced the government to stop pegging the currency to the dollar, and the lira’s value dropped to 1.65 million per dollar from 694,000 in eight months.

By 2004, the lira was the world’s least valuable currency. Children had to carry 1,500,000 liras to buy a bar of chocolate, and the government budget was 160,938,000,000,000,000 liras ($120 billion).

Erasing Zeroes

Turkey erased six zeroes from its bank notes in January 2005 as inflation slowed to single digits for the first time since the 1970s, the government completed an IMF loan accord, and European Union membership talks began. Inflation hasn’t exceeded 13 percent since.

Now a chocolate bar costs 1 lira and the government budget is 287 billion liras ($192 billion).

The lira is no longer a “banana republic currency” after the government tightened monetary policy, strengthened the banking system and made markets more transparent, said Hakan Kalkan, who helps manage about $700 million Autonomy Capital in London, including Turkish assets.

“From a currency that no one gave a glance, even at times of three-digit interest rates, there is a completely different picture now,” he said in an April 21 interview. “The lira is becoming a world currency.”

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