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Lira Debt in Firing Line as ‘Flimsy Five’ Exposed: Turkey Credit

The Turkish central bank’s pledge to keep interest rates unchanged through year-end is leaving lira debt vulnerable to renewed selling as nations from Indonesia to India raise borrowing costs to shore up their markets.

The yield on 10-year lira bonds jumped 16 basis points yesterday to a seven-week high of 9.33 percent, the most in Europe, the Middle East and Africa emerging markets. The rate has climbed 48 basis points since a report Nov. 8 showed U.S. non-farm payrolls increased more than forecast.

While Indonesia unexpectedly raised its main rate yesterday following two increases by India since Sept. 20, Turkey has kept its benchmark rate on hold. The nations’ current-account deficits expose them to shifts in investor sentiment as the U.S. moves closer to cutting stimulus, according to Esther Law at Pioneer Investment Management Ltd.

“The increase in policy rates in India and Indonesia could put further tightening pressure on Turkey,” Law, who helps oversee the equivalent of $5.6 billion as a money manager at Pioneer in London, said by e-mail yesterday. “This in turn could push local yields higher, resulting in more selling in local bonds especially by foreigners.”

The lira advanced 0.2 percent to 2.0516 per dollar at 5:01 p.m. in Istanbul today after the current-account deficit widened more than expected in September. The gap of $3.3 billion exceeded the $2.6 billion median-estimate in a Bloomberg survey of 10 economists. The currency slid 12 percent in six months as the Federal Reserve signaled in May that it could start to tapering stimulus should the economy show sustained improvement.

‘Flimsy Five’

Economists predict the Fed will maintain bond purchases until March. Policy makers unexpectedly kept their full bond-buying program at their meeting in September.

“I guess the decision to delay a move to taper by the Fed in September bought more time for emerging markets to adjust to the inevitable eventual move to taper -- particularly the Flimsy Five” of India, Indonesia, Turkey, South Africa and Brazil, Timothy Ash, chief emerging-market economist at Standard Bank Group Ltd. in London, said by e-mail yesterday. “These countries have revealed structural vulnerabilities. In Turkey for example, I am not that convinced that we are seeing that much in the form of tightening.”

While central bank Governor Erdem Basci has kept interest rates unchanged, he has raised the average cost of funds for lenders in a bid to rein in inflation. The funds’ cost was 6.80 percent on Nov. 12, compared with an average of 5.75 percent in the past six months.

Inflation in Turkey slowed less than economists estimated last month, to 7.71 percent, and has remained above the central bank’s target since April 2011, according to data released on Nov. 4. That compares with a central bank target of 5 percent.

‘Rigid Stance’

“The rigid stance of the central bank in Turkey leaves the lira more vulnerable,” Emre Balkeser, the head of sales and trading at Garanti Yatirim Menkul Kiymetler in Istanbul, wrote in e-mailed comments. “The latest inflation data showed that inflation will come out higher than expected at the end of the year. All these factors weaken the case for Turkey under the current global circumstances.”

Turkey’s current-account gap will probably widen to 6.9 percent of gross domestic product this year from 6 percent in 2012, according to a Bloomberg survey of economists. That compares with 3.5 percent for Brazil and 3 percent for Indonesia, separate surveys showed.

Credit-default swaps, contracts insuring Turkey’s debt against default, fell three basis points to 208, data compiled by Bloomberg show. The yield on two-year notes decreased six basis points to 8.83 percent.

“Turkey is facing this risk that it could be perceived as being behind the curve,” Zsolt Papp, who helps oversee $2.6 billion of emerging-market debt at Union Bancaire Privee in Zurich, wrote in e-mailed comments. The country is seen as “vulnerable to external shocks due to its relatively large current-account deficit,” he said.

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