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Slowdown Spurs Best Dollar Bond Gain in 18 Months: Turkey Credit

Governor of Turkey's Central Bank Erdem Basci
Erdem Basci, governor of Turkey's central bank, cited slowing growth for two interest rate cuts this year. Photographer: Goh Seng Chong/Bloomberg

Feb. 29 (Bloomberg) -- Turkey’s dollar bonds are poised for their best month in 1 1/2 years as slowing economic growth spurs speculation demand for imported goods will ease, narrowing the country’s record current-account deficit.

The yield on Turkish dollar bonds fell the most since July 2010 this month, outperforming 39 of the 45 emerging markets in JPMorgan Chase & Co.’s EMBI Global index. The extra yield for Turkey over U.S. Treasuries dropped 56 basis points to 338.

The world’s second-fastest expansion after China among major economies last year helped send the current-account gap to more than 10 percent of gross domestic product, prompting Goldman Sachs Group Inc. to warn of a possible recession. Industrial production slowed and capacity utilization fell for a fourth month, government data show. Central bank Governor Erdem Basci cited slowing growth for two interest rate cuts this year.

“For me, nothing could be better for Turkey than a nice recession,” Edwin Gutierrez, a fund manager who helps oversee about $7.5 billion in emerging-market debt at Aberdeen Asset Management Plc in London, said by phone on Feb. 27. “Nothing would do more to address that deficit than to have an import collapse which would come from a softening of growth.”

Aberdeen bought some of Turkey’s dollar bonds due in 2022 sold this year, Gutierrez said. The yield on the debt fell two basis points, or 0.02 percentage point, today to 5.36 percent, compared with 6.14 percent when they first traded on Jan. 23, data compiled by Bloomberg show.

Achilles Heel

Turkish economic growth may slow to 0.4 percent this year, from 8.3 percent in 2011, according to a report prepared by International Monetary Fund staff for a meeting of the Group of 20 nations in Mexico City on Jan. 19. The government forecasts that Europe’s eighth-biggest economy will grow at least 4 percent, down from a pace of 9.6 percent in the first nine months of 2011, which was topped only by China among the G-20.

Turkey’s current-account deficit narrowed for a second month in December, its first back-to-back drop in a year, the central bank said Feb. 13. The 12-month cumulative deficit shrank to $77.1 billion, or about 10 percent of output.

“Turkish bonds benefited massively from the previous two current-account data releases,” Felix Herrmann, a Frankfurt-based analyst at DZ Bank AG, said in e-mailed comments. “The current-account deficit is considered the Achilles heel of the Turkish economy.”

Lira Rallies

The nation’s central bank has been trying to pare growth without causing a recession after record-low interest rates spurred demand for imports and sent the current-account g soaring. Reduced concern about Turkey’s ability to finance the gap has helped the lira gain 8.5 percent against the dollar this year, recouping some of last year’s 18 percent loss, the biggest among emerging-market currencies tracked by Bloomberg.

The central bank spent about $15 billion of its foreign-exchange reserves since August last year to support the lira, central bank governor Basci said Jan. 6.

Turkey’s dependency on foreign financing will leave it vulnerable to “more serious downside risks over the long term,” Ahmet Akarli, Goldman’s economist for the region based in London, said in an e-mailed report on Feb. 10. The deficit will narrow to around 8 percent of GDP by mid-2012 before widening to around 9.5 percent by early 2013, Akarli said.

Raising Forecast

Goldman boosted its forecast for Turkey’s economic growth this year to 2.5 percent from 0.8 percent estimated in December. The bank had predicted a likely contraction for late 2011 and early 2012, according to a report in December. Bank of America Merrill Lynch also said in December Turkey faced a possible recession.

Rising crude prices risk pushing up inflation as Turkey imports all its oil, the central bank said in the minutes of its Feb. 21 interest-rate meeting. The bank cut its overnight lending rate one percentage point to 11.5 percent at that meeting because the “risk of a rapid capital outflow has reduced” following monetary expansion in developed economies, according to the minutes.

The lira strengthened for a third day today, gaining 0.5 percent to 1.7434 per dollar, the strongest in more than a week. The currency has appreciated 1.9 percent so far in February.

Yields on two-year benchmark bonds in liras fell for the second day, dropping 10 basis points to 9.13 percent. They have fallen 31 basis points in February, after declining 160 basis points in January.

Default Risk

The cost of protecting Turkish bonds against default using five-year credit-default swaps fell seven basis points to 242, compared with a spread of 188 for Russia, which is rated three levels higher by Standard & Poor’s, and 200 for Poland, rated five levels higher, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately-negotiated market. Turkey’s credit default swaps have fallen 35 basis points this month, the most since October.

Turkish contracts cost 26 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.

Moody’s Investors Service rates Turkey Ba2, two steps below investment grade, with a positive outlook. S&P also rates Turkey at two levels below investment grade at BB.

Debt Rally

A decline in the extra yield on Turkey’s dollar bonds over U.S. notes this month snapped three months of increases, JPMorgan indexes show.

Demand for emerging market assets has been fueled by signs of economic recovery in the U.S. and unlimited three-year loans from the European Central Bank to euro-area banks.

The average spread over U.S. Treasuries for dollar bonds sold by emerging-markets declined for a second month in February, falling 43 basis points to 369 basis points, according to JPMorgan.

“Turkey’s dollar-denominated bonds have long underperformed relative to other emerging-market Eurobonds because of the country risk perceptions,” Bugra Bilgi, a hedge fund manager at Garanti Asset Management in Istanbul, said in e-mailed comments. “It is possible that expectations of improvement in the current-account deficit fueled buying for those bonds.”

To contact the reporters on this story: Jason Webb in London at; Selcuk Gokoluk in Istanbul at

To contact the editor responsible for this story: Gavin Serkin at

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