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Buy Turkish Five-Year CDS or Sell Liras, RBS Analysts Say

Investors should buy Turkish five-year credit default swaps or sell liras, Royal Bank of Scotland Group Plc said, citing a record current account deficit, external financing needs of more than $200 billion next year and accelerating inflation.

The central bank is more focused on delivering growth than low inflation, Royal Bank of Scotland said in an e-mailed report today in its 2012 outlook for central and eastern Europe, the Middle East and Africa.

“Either domestic demand has to slow dramatically, (the ‘‘hard’’ landing), or the currency has to correct, possibly to 2.1 liras per dollar, or both,” said analysts including Tim Ash, head of global emerging market strategy and Demetrios Efstathiou, chief of strategy for the region.

Turkey’s five-year CDS, which pays buyers should a government or company fail to adhere to its debt agreements, rose 0.3 percent to 290.750 yesterday. An increase in the price of CDS corresponds with an increase in investor perception of risk. The lira fell 0.1 percent to 1.8799 per dollar at 4:22 p.m. in Istanbul today.

Inflation, Rates

There is no problem with Turkey’s current account deficit after the authorities took steps to tackle it, Economy Minister Zafer Caglayan said in Geneva, Switzerland yesterday, according to state-run Anatolia news agency. The central bank’s priority is inflation and it stands ready to tighten monetary policy further to contain price rises, governor Erdem Basci said on Dec. 12. Meanwhile the economy is on course to meet a 4 percent growth target for next year, he said.

The central bank has cut the benchmark one-week lending rate three times over the past year to a record low of 5.75 percent, then announced it would lend to banks at rates between 5.75 percent and 12.5 percent to help squeeze liquidity. Economic growth slowed to 8.2 percent in the third quarter, a pace exceeded only by China, from 8.8 percent in the previous three months, the statistics agency said this week.

The International Monetary Fund said in a Dec. 7 report that the central bank should increase the benchmark rate and the economy now risks a sharp slowdown.

The current-account gap in October was $4.2 billion, taking the 12-month cumulative deficit to $78.6 billion. That’s about 10 percent of gross domestic product. Inflation accelerated to 9.5 percent in November from 7.7 percent the previous month, more than double a record low of 4 percent in March.

The country’s long-term prospects look “very strong” with its “favorable demographics, an entrepreneurial culture, a strong manfacturing base and diversified export structure,” Efstathiou and Ash said.

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