Biggest G-20 Current Account Deficit Stalls Rally: Turkey Credit

Turkey's Central Bank Governor Erdem Basci
Erdem Basci, Turkey's Central Bank governor. Photographer: Goh Seng Chong/Bloomberg

The biggest bond rally in emerging markets may be derailed by Turkey’s current-account deficit, the largest among the Group of 20 countries.

The deficit unexpectedly stayed at $6 billion in January compared with a year ago, central bank data published yesterday in Ankara showed. That undermined predictions by policy makers of an improvement and revived investor concern that Turkey may struggle to finance the gap. Global oil prices have risen more than 7 percent this year, raising costs in a country that imports nearly all its energy.

Two-year benchmark bonds denominated in liras fell for a second day, driving yields 14 basis points, or 0.14 percentage point, higher to 9.32 percent, according to the Turk Ekonomi Bankasi AS index of the securities yesterday. The lira weakened for a second day to 1.7945, the lowest since Jan. 25.

“We’re quite worried about the current-account deficit and I think this number confirms our belief that you should be very concerned about the situation in Turkey,” Jens Thellesen, who helps manage about $1.5 billion in emerging-market debt at Jyske Bank A/S in Silkeborg, Denmark, said yesterday. “We think the risk reward is better in other countries.”

The difference in yield investors demand to own Turkish dollar debt rather than Treasuries dropped six basis points, or 0.06 percentage point, to 300 basis points today, the lowest this year, according to the JPMorgan Chase & Co.’s EMBI Global index. The overall index of major emerging-market debt fell three basis points to 336.

Turkish bonds due in two years rebounded today, with yields declining three basis points to 9.29 percent at 10:55 a.m. in Istanbul. The lira strengthened 0.3 percent to 1.7913 against the dollar.

Achilles Heel

The current account and inflationary effect of imports has been the Achilles heel in Turkey’s burgeoning economy. Gross domestic product expanded 8.5 percent last year, Economy Minister Zafer Caglayan estimated Feb. 28. That’s a percentage point faster than targeted and second only to China in the Group of 20 major economies.

The government’s medium-term economic plan, announced on Oct. 14, sees the current-account deficit narrowing to 8 percent of GDP this year and 7.5 percent in 2013. It was 10 percent of estimated GDP last year, making it the largest as a proportion of the size of a country’s economy in the G20, according to International Monetary Fund forecasts.

“A contraction to 8 percent isn’t something that can be cited as an accomplishment,” Aziz Unan, who manages about $55 million of assets in the Ottoman Fund for Renaissance Asset Managers in London, said in a March 9 telephone interview. “The sustainable level for Turkey’s current-account gap over the next five years is 4 percent to 5 percent, assuming a lot of foreign funds flowing into the country and no contraction.”

Lira Rebounds

Still, the yield on Turkish bonds has fallen 169 basis points this year, the most among 15 emerging markets tracked by Bloomberg, and the lira rallied as weakening industrial output and slowing inflation signaled central bank Governor Erdem Basci may be succeeding in restraining domestic demand.

The 12-month rolling current-account deficit has been declining since reaching at a record $78.6 billion in October. It fell to $77.8 billion in January.

“The number was more than expected but it was in line with the recent trend and the expectation is for the current-account deficit to remain wide,” Jerome Booth, head of research at Ashmore Investment Management with $60 billion of assets in emerging markets, said in a phone interview from London. “Moreover, the government seems to be comfortable with that.”

Yields on two-year government bonds may now hit 9.5 percent, though are unlikely to make it to double digits, according to Cem Tozge, who manages the equivalent of $57 million at Ata Asset Management in Istanbul.

Turkey Attracts

“When you look at Turkey’s macro picture, notwithstanding the current-account deficit, it’s much stronger than its peers,” Tozge said by telephone. “Turkey would attract foreign investments once again in a high-yield environment.”

Limits on credit growth and a weaker lira are narrowing the deficit and cheap lending by the U.S. Federal Reserve and the European Central Bank mean financing for the current account is plentiful, according to central bank forecasts released Jan. 31.

Economic growth in the country of 75 million boosted tax revenue last year, allowing the government to report a budget deficit of 1.4 percent of GDP, the smallest gap since 2006. The ratio of debt to GDP probably fell below 40 percent, according to the government, compared with 74 percent when Prime Minister Recep Tayyip Erdogan took office.

Energy Imports

A decline in the deficit is predicated on the government’s forecast of $49.5 billion in annual energy imports this year. Rising global oil prices could drive the import bill for oil and gas to $65 billion, Economy Minister Caglayan said March 7. Energy made up 22 percent of Turkish imports last year, or $54.1 billion, according to the statistics office.

The record current-account deficit helped drive the lira 18 percent lower against the dollar last year, the biggest drop among emerging-market currencies tracked by Bloomberg.

“The temptation is to focus on the non-energy deficit, which is improving as the economy does rebalance as growth slows,” Tim Ash, the London-based chief of emerging markets at Royal Bank of Scotland Group Plc, said in an e-mailed report today. “The reality is that the full current-account deficit has to be financed, including the energy deficit which seems to be rising and is in any event very much structural in nature.”

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