Turkish central bank Governor Erdem Basci’s policy of defending the lira by limiting money supply to banks may sacrifice the government’s success in reducing borrowing costs.
The Central Bank of the Republic of Turkey cut lending through its one-week repurchase auction by 33 percent to 4 billion liras ($2.2 billion) yesterday after the local currency tumbled to a six-week low against the dollar, data compiled by Bloomberg show. The yield at a five-year Treasury auction the same day rose to an average 9.56 percent, the highest for the maturity since Jan. 23. Turkey’s local two-year bond yields have tumbled 162 basis points this year, the most among 15 developing nations tracked by Bloomberg.
“It looks like the central bank was more concerned about the lira than the Treasury’s auction,” Emre Balkeser, the head of trading in Istanbul for Garanti Investment, the brokerage unit of Turkey’s second biggest bank Turkiye Garanti Bankasi AS, said in e-mailed comments yesterday.
Basci, 45, is seeking to offset pressure on the lira after the government said March 12 that the current-account deficit unexpectedly stayed at $6 billion in January compared with a year ago as global oil prices rose more than 7 percent this year. Turkey’s shortfall is equivalent to 10.3 percent of gross domestic product, the highest among 60 major economies tracked by the International Monetary Fund. The lira plunged 18 percent last year on speculation record-low interest rates were fueling purchases of imports.
The lira has lost 2.6 percent against the dollar so far this month, the third biggest decline among 25 emerging markets tracked by Bloomberg, and paring this year’s gain to 5.4 percent. The currency fell to as low as 1.8003 on March 12 and weakened 0.2 percent to 1.7944 per dollar today.
“The bank defends 1.80 per dollar in good times and 1.90 in bad times,” said Balkeser.
The extra yield investors demand to hold Turkey’s two-year lira bonds rather than equivalent South African debt is up from a five-week low, while the spread has widened from the narrowest in two months relative to Brazil in the past month.
Higher borrowing costs threaten efforts by Turkish Prime Minister Recep Tayyip Erdogan to reduce the government’s debt to 37 percent of GDP this year from 40 percent.
Yields on Turkish two-year bonds have increased 20 basis points this week, even after a worse-than-forecast slump in Turkish industrial output last week eased concern about the pace of the economic expansion and inflation. The Treasury’s borrowing in March at 9.58 billion liras has fallen short of its target of 10 billion liras.
Borrowing costs are still lower overall this year, with rates on dollar debt due in 2030 dropping 51 basis points, or 0.51 percentage point, to 5.5 percent in 2012, data compiled by Bloomberg show. The premium over U.S. Treasuries fell four basis points to 301 yesterday, according to the JPMorgan Chase & Co.’s EMBI Global index.
The cost to insure Turkish bonds against non-payment using credit-default swaps dropped four basis points to 218, the lowest since August, according to data from CMA, which is owned by CME Group Inc. and compiles quotes by dealers in the privately-negotiated market.
“This is telling me that currency is more of a worry than Turkish creditworthiness,” Vadim Sobolevski, the head of fixed-income research at Otkritie Capital in London, said in e-mailed comments.
The central bank supported previous Treasury auctions by stepping up funding to banks in the hours beforehand. The bank provided as much in one-week repo auctions as lenders repaid on March 9 and 12, before cutting funds yesterday to 4 billion liras from 6 billion liras. The overnight repo rate on the interbank market jumped to 9.44 percent yesterday from 6.6 percent on Feb. 13.
The government is targeting a reduction in the current-account deficit to 8 percent of GDP this year and 7.5 percent in 2013, according to forecasts from the government’s medium-term economic plan announced in October.
“Current account worries will probably magnify the central bank concerns with the currency,” said Luis Costa, an emerging-market strategist at Citigroup Global Markets Ltd in London.
Basci lowered the upper limit for interest rates charged to banks to 11.5 percent from 12.5 percent on Feb. 21. The central bank’s next Monetary Policy Committee meeting is scheduled for March 27.
“The market sentiment is that there was a premature change in the monetary policy amid persistently high inflation and wide current account deficit,” Murat Toprak, chief currency strategist for Europe, the Middle East and Africa at HSBC Holdings Plc in London, said in e-mailed comments. “The next Monetary Policy Committee meeting will be crucial. If the central bank fails to sound hawkish, it would be lira-negative.”