The threat of Turkey’s debt being returned to junk by Moody’s Investors Service risks arresting a 2 1/2-month rally by the lira, countering the improvement in the nation’s current-account deficit amid a pick-up in exports.
The Turkish currency fell for the fourth straight day and the yield on Turkish government two-year notes rose the second most among emerging markets government bonds tracked by Bloomberg. On April 11, Moody’s lowered the nation’s sovereign outlook to negative, citing political uncertainty, lower global liquidity and pressure on external financing, 11 months after raising the debt to investment grade.
While analysts including Recep Atakan at Anadolubank AS and Baris Buyukdemir at Ceros Securities downplayed the outlook change, Goldman Sachs Group Inc. predicted the lira will weaken 18 percent over the next 12 months. The currency’s gains since the central bank unexpectedly raised interest rates in January have helped rein in import costs, while the economic recovery in Europe is fueling Turkey’s best start to a year for exports.
“Turkey is seen as exposed to a scenario of further capital outflows from emerging markets,” Zsolt Papp, a money manager who helps oversee $2.6 billion of emerging-market debt at Union Bancaire Privee in Zurich, said by e-mail April 11. “Still, the political risks cited by Moody’s are nothing new.”
The current-account gap, which Moody’s said was a key vulnerability, narrowed an annual 37 percent to $3.19 billion in February, data published April 11 by the central bank in Ankara showed. The shortfall, which makes the economy susceptible to shifts in global investor sentiment, will probably narrow to 6 percent of gross domestic product this year, from 7.9 percent in 2013, according to surveys of economists by Bloomberg.
Accelerating recovery in Europe may see the deficit narrow to below 5.5 percent of GDP, Serhat Gurleyen, head of research at Is Investment in Istanbul, said last week before the current-account data was released.
Turkey’s exports reached $25.6 billion in the first two months of the year, according to the state statistics office. The economy of the European Union, which accounted for 42 percent of Turkish exports in 2013, may expand 1.5 percent this year and 2 percent in 2015, following 0.1 percent growth last year, European Commission data show.
The lira weakened 0.6 percent to 2.1264 per dollar as of 3:10 p.m. in Istanbul. The yield on two-year notes rose nine basis points to 10.03 percent.
The currency tumbled 22 percent from the end of May to a record 2.39 per dollar on Jan. 27 amid anti-government protests, speculation the U.S. would cut back stimulus and an investigation into alleged government corruption. The selloff prompted the central bank to raise its benchmark rate to 10 percent from 4.5 percent after an emergency meeting on Jan. 28, spurring a rally in the lira.
“The deficit is narrowing as the currency’s earlier depreciation slowly kicks in,” Buyukdemir, general manager at Ceros Securities in Istanbul, said by phone April 11. “The Moody’s cut has become an excuse for some profit taking.”
The probe implicating the government that surfaced in December highlights “intensifying internal political divisions” that will persist until at least parliamentary elections in the second quarter of 2015, Moody’s said. In May, it raised Turkey to Baa3, the lowest investment grade and on par with India and Ireland. Standard & Poor’s, which rates Turkey at its highest non-investment grade, lowered its outlook to negative in February.
Investors routinely ignore ratings companies’ decisions. In almost half the instances, yields on government bonds fall when a rating action by Moody’s and rival S&P suggests they should climb, or they increase even as a change signals a decline, according to data compiled by Bloomberg on 314 upgrades, downgrades and outlook changes going back as far as the 1970s. When S&P downgraded the U.S. government in August 2011, bonds rose and pushed Treasury yields down to records.
The lira’s rebound means the currency is again overvalued, according to Goldman Sachs economists including Ahmet Akarli and Mark Ozerov. Its strength is “ultimately unsustainable” as the global market backdrop becomes more dollar-supportive, they said in a report e-mailed April 11. They see the currency at 2.50 per dollar in 12 months.
Turkey’s currency has gained 5.9 percent since the emergency rate increase and as Prime Minister Recep Tayyip Erdogan’s party gained support in local elections last month.
“The Moody’s assessment seems to be outdated,” Atakan, executive vice president of Treasury at Anadolubank in Istanbul, said by phone April 11. In its emphasis on political instability, the statement reflects “pre-local election mood,” he said.