The cost of insuring Turkish debt against currency losses is rising as global banks including Goldman Sachs Group Inc., HSBC Holdings Plc and Credit Agricole SA predict policy makers will act to reverse lira gains.
One-year currency swaps on the lira, used to protect foreign investors switching from dollars to buy Turkish bonds, rose 14 basis points since Dec. 4, the first three-day increase since September, according to data compiled by Bloomberg. That makes it more expensive to hedge investments in the best-performing debt among 19 major emerging markets this year. HSBC says it’s “one of the most expensive currencies” in that universe.
The banks are betting the lira will fall as policy makers cut rates this month to stimulate an economy that the government forecasts will slow to 3.2 percent this year from 8.5 percent in 2011. The central bank’s index for the real effective exchange rate, or REER, which measures the lira against the currencies of Turkey’s main trading partners, rose to 119.2 on Dec. 4. The central bank would consider a value of 120 to be “overvalued,” Governor Erdem Basci said on Nov. 9.
“We expect short-term depreciation as the central bank is targeting the REER level,” Guillaume Tresca, senior emerging-market strategist at Credit Agricole in Paris, said in e-mailed comments yesterday. The French bank cut its forecast for the lira to 1.83 a dollar by March from 1.74, he said, citing “a more dovish central bank” and “the threat of rate cuts,” he said.
The central bank’s concern over the lira’s strength, which makes Turkish goods relatively less competitive for exports, marks a stark turnaround from last year. The lira plunged 18 percent against the dollar in 2011 after Basci cut his benchmark rate to a record low 5.75 percent in August.
He reversed course in October last year and doubled the effective cost of central bank funding to banks using a dual-rates policy. The lira has gained 5.6 percent since the end of December, the third-best performance among 10 markets in eastern Europe, the Middle East and Africa.
“The lira is one of the most expensive currencies in the EMEA space,” Murat Toprak, head of currency strategy for the region at HSBC in London, said in e-mailed comments yesterday. “The lira will underperform going forward and selling the lira versus some other emerging-market currencies makes sense.”
The cost of a one-year currency swap for lira debt rose to 4.89 percent at 4:40 p.m. in Istanbul today from 4.75 percent on Nov. 4. The lira fell 0.1 percent today to 1.7908 per dollar. Futures contracts show the currency at 1.8105 in February and 1.8210 in April.
Goldman Sachs forecasts are more bearish. The New York-based investment bank sees the lira weakening in three months to 1.90 before paring its loss to 1.85 six months to a year from now. The currency may continue to gain this month, Goldman analysts Ahmet Akarli and Michael Hinds said in a report published Dec. 5, saying that it may prompt the central bank “to act on its previous market guidance and begin to ease.”
The lira is “the world’s most overvalued currency” and “investors need to recognize that at some stage they are likely to face losses on their investments,” a report from the Peterson Institute for International Economics in Washington said on Nov. 30. “Turkey’s situation has this element of precariousness hanging over it.” Peterson Institute Chairman Peter G. Peterson is co-founder of the Blackstone Group and was secretary of commerce under President Richard Nixon.
The central bank’s next rates decision is on Dec. 18. Current-account figures for the third quarter, which will show the widest view of Turkish trade and financial flows, are due to be published by the central bank on Dec. 11.
The deficit may fall to $57.3 billion by year-end, according to a bi-weekly survey of economists by the bank published yesterday. That was compared with $77.1 billion last year, when Turkey had the second-biggest deficit in the world, behind the U.S.
The shortfall may equal 6.3 percent of gross domestic product by year-end, according to the average of 15 economist estimates on Bloomberg. That compares with 2.3 percent for Brazil and a surplus of 4.5 percent for oil-exporting Russia.
The decrease in the deficit helped reassure investors on Turkey’s economy and pushed yields on two-year notes down 524 basis points this year. That’s more than double the decline in 2012 among all of the 19 other major emerging markets tracked by Bloomberg, except Brazil, where yields fell 310 basis points. Two-year debt yielded 5.77 percent today after reaching a record low earlier this week.
Five-year credit-default swaps on Turkey were unchanged at 126 today. That compares with 134 for Russia and 109 for Brazil. Declining prices show improving perceptions for a borrower’s creditworthiness, and gains indicate the reverse. The contracts pay the buyer face value in exchange for the underlying securities or cash if a borrower fails to adhere to its debt agreements.
The extra yield investors demand to hold Turkish debt denominated in dollars rather than U.S. Treasuries fell six basis points to 180, according to JPMorgan Chase & Co.’s EMBI Global Index. That’s down from 385 at the end of last year and compares with 189 for Russia, 442 for the average of countries in the Middle East and 228 for emerging-market countries in Europe.
While the current-account balance improved this year on the back of Basci’s higher rates, the central bank is likely to now cut rates in order to “stimulate corporate lending,” Nigel Rendell, a senior analyst at Medley Global Advisors in London, said by e-mail yesterday. HSBC, Goldman Sachs and Credit Agricole also expect a rate cut this month.
“The Turkish economy still has some problems such as the large current-account deficit, which undoubtedly is negative for the lira,” Stanislava Pravdova, an analyst at Copenhagen-based Danske Bank A/S, said in e-mailed comments yesterday. “We will basically keep our bearish view on the lira.”