Roubini Flummoxed as Lira Slide Clouds Rate Bets: Turkey Credit
Nouriel Roubini is no clearer on whether Turkey’s central bank will cut borrowing costs tomorrow than economists or traders after a drop in the lira prompted investors to pare bets for a reduction in interest rates.
One-year interest-rate swaps, which indicate investor expectations on borrowing costs, have reversed their decline since Nov. 14 after central bank Governor Erdem Basci signaled he may lower rates to prevent a strengthening lira widening the current-account deficit. Two-year notes snapped a seven-day rally that cut yields to a record 6.27 percent Nov. 14, while the lira fell versus the dollar for the first week in three.
Roubini, the New York University professor who predicted the U.S. 2008 financial crisis, said Nov. 15 on BloombergHT television in Turkey that it wasn’t “very clear” what the central bank should do because growth and inflation objectives were moving in different directions. Basci will keep the benchmark rate -- the lowest end of his corridor for borrowing costs -- at 5.75 percent even as he cuts the top end, according to median forecasts in economist surveys by Bloomberg.
“With the verbal intervention, Basci wanted to illuminate the expectation of further intervention if the lira became overvalued,” Sengul Dagdeviren, an economist at ING Bank in Istanbul, said in a telephone interview on Nov. 16. Now there’s “no rush” for him to lower the rate. “Uncertainties are high” as to what he will do, she said.
Currency forward rates indicate the lira will weaken to 1.81 to the dollar by Dec. 31 and 1.90 by the end of next year from this year’s average of 1.80, according to data compiled by Bloomberg. Toronto-Dominion forecasts the lira will depreciate 2.5 percent in the first quarter to 1.85 per dollar. Turkish bonds may become less appealing to foreign investors should the lira weaken, possibly pushing yields up. Turkey’s two-year yield of 6.43 percent compares with 6.73 percent for Russia.
The central bank is monitoring its index of the lira’s real exchange rate measured against the currencies of its main trade partners, Basci told the state-run Anatolia news agency in a televised interview on Nov. 12. “We may respond in the short term,” if the action is warranted, he said.
“If the lira becomes overvalued, we will lose our advantage with respect to the external balance,” Basci said. An index level of 120 would suggest that is happening, and “we may respond in the short term,” while if the measure passes 125 then “a stronger policy response” would be needed, he said. The index stood at 119 at the time Basci spoke.
Basci created an interest-rate corridor last year that allows him to adjust rates daily in a bid to deter capital inflows that helped widen the current-account deficit to $77 billion in 2011, or 10 percent of the Turkish economy. He cut rates to an all-time low of 5.75 percent in August 2011, spurring a 12 percent drop by the lira to a record, and sending yields on the benchmark bond 390 basis points higher for their biggest increase in five years.
“There is no need for the central bank to cut the one-week repo or the overnight borrowing rate,” Piotr Matys, an analyst at 4cast Ltd. in London, said by e-mail Nov. 16, pointing to the effect of Basci’s comment on the lira last week.
Fitch Ratings upgraded Turkey to investment grade on Nov. 5, the country’s first such rating in almost two decades, prompting predictions of an increased flow of international investment to the country.
Matys said the lira will regain its momentum in the months ahead, driven by the capital inflows fueled by the Fitch upgrade.
Turkey’s economy grew at 2.9 percent in the second quarter, the slowest pace since the 2009 recession. After a further slowdown in the third quarter, it’s set to rebound in the current period and in the first half of 2013, according to economists surveyed by Bloomberg.
Credit growth shouldn’t be allowed to exceed a 15 percent annual pace, Basci said in the Anatolia interview Nov. 12. If policy tightening is needed, it can be achieved through reserve- requirement ratios, he said.
Increased inflows since January helped the lira and debt recoup last year’s losses as foreign ownership of Turkish bonds and stocks rose to a record $57.6 billion and $61.8 billion, respectively, as of Nov. 2, according to data from the central bank on Nov. 8.
Barclays Plc said Nov. 7 that Moody’s Investors Service may also raise Turkey to investment grade in the first half of next year, triggering as much as $2.5 billion in additional demand for Turkey’s Eurobonds. Moody’s rates Turkey Ba1, its highest junk ranking, while Fitch rates it BBB-, its lowest investment grade. Standard & Poor’s ranks it BB, its second-highest junk level.
Emerging-market stocks fell, driving the benchmark MSCI Emerging Markets Index (MXEF) to its biggest weekly drop since July, as escalating Middle East tensions and concern over the U.S. economy cut demand for riskier assets.
“I don’t think it’s verbal intervention,” that drove the currency down, Ozan Gaziturk, an analyst at Sekerbank in Istanbul, said by phone on Nov. 16. “If we compare similar emerging-market currencies since the beginning of the week, they were also depreciating against the dollar.”
He forecasts a policy-rate drop of 25 basis points, or 0.25 percentage point, to the lower end of the corridor, while saying that will be balanced by required reserve increases.
Credit-default swaps rose one basis point on Nov. 16 to 155, according to data compiled by Bloomberg. The contracts pay the buyer face value in exchange for the underlying securities or cash should a borrower fail to pay its debt obligations. Rising prices signal worsening investor perceptions of creditworthiness.
The premium investors demand to hold Turkey’s dollar- denominated debt over U.S. Treasuries widened three basis points to 201, according to JPMorgan Chase & Co.’s EMBI Global Index. That’s down from 385 at the end of last year and puts Turkey below Russia’s 207.
The lira was little changed at 1.8003 per dollar at 9:35 a.m. in Istanbul today, holding this year’s gain at 5 percent. The Russian ruble gained 0.3 percent. The yield on benchmark two-year securities was unchanged at 6.43 percent.
Turkey’s current-account deficit narrowed for an 11th month in September as a slowing economy curbed imports, while exports driven by sales of gold accelerated.
The deficit shrank to $2.7 billion from $6.4 billion the same month a year before, the central bank in Ankara said on its website Nov. 15. It was forecast at $3 billion, according to the median estimate of 10 economists surveyed by Bloomberg.
“The central bank will have to use all tools at its disposal to prevent substantial lira appreciation next year,” 4Cast’s Matys said.
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