Moody’s Upgrade After Surprise Cuts Propels Bonds: Turkey CreditSelcuk Gokoluk
Turkish bonds surged and the lira touched an 11-month low after a bigger-than-forecast cut to interest rates preceded a decision by Moody’s Investors Service to raise the nation’s credit rating to investment grade.
Yields on local benchmark notes slipped to a record-low 4.61 percent today and are down 483 basis points over the past 12 months, the steepest decline worldwide, according to data compiled by Bloomberg. The lira weakened to the lowest intraday level since July yesterday before paring the decline in U.S. hours after the Moody’s upgrade.
The central bank in Ankara lowered the benchmark repo rate by 0.5 percentage point to 4.5 percent yesterday, and the top and bottom ends of its so-called interest-rate corridor by the same amount. The cuts, twice as large as estimated in Bloomberg surveys, came after the bank’s index for the currency’s value against Turkey’s trading partners rose past the level that Governor Erdem Basci says represents an overvalued lira.
The rate cuts are “a strong indication of the central bank’s resolve to prevent real appreciation” in the currency, Inan Demir, chief economist at Finansbank AS in Istanbul, said in e-mailed comments. “The important question against this background is whether fixed-coupon bonds offer enough reward to compensate for the prospect of lira depreciation. Judging by the immediate reaction, the market seems to think so.”
Moody’s lifted Turkey’s rating yesterday by one step to Baa3, the lowest investment grade, citing government efforts to reduce the current-account deficit and the nation’s debt load. The central bank needs to be prepared for appreciation pressure on the lira after the Moody’s decision, Economy Minister Zafer Caglayan said in an e-mailed statement.
The lira dropped 1 percent to 1.8433 per dollar at 5:17 p.m. in Istanbul, sliding for seventh day in the longest streak of losses in almost two years.
Moody’s, which hasn’t rated Turkey investment grade since 1994, follows Fitch Ratings, which awarded Turkey its first investment-grade ranking in 18 years in November. The nation’s debt level has fallen by 10 percentage points since 2009 to 36 percent of gross domestic product, Moody’s said.
“Turkey credit has been misrated for a long time,” Blaise Antin, head of emerging-market research at TCW Group Inc. where he helps oversee $11.5 billion in developing-nation debt, said by phone from Los Angeles. “The government has done a good job to prove a stable policy backdrop.”
Yields on two-year lira notes slid 24 basis points, or 0.24 percentage point, yesterday, extending their drop to 135 basis points this year. Yields fell another one basis point today. They’re still higher than the 3.80 percent afforded comparable debt of Mexico, or Poland’s 2.49 percent yield.
The central bank’s real effective exchange rate index for the lira rose to 121.1 last month, the highest level in more than two years. The bank says it’s monitoring that measure, and that a reading above 120 indicates an overvalued currency.
The lira has weakened 3.2 percent against the dollar this year, compared with a 4.9 percent decline in the Polish zloty, 2.9 percent drop for Russia’s ruble and the 9.8 percent slump in the South African rand.
Central banks overseeing about 25 percent of the world’s gross domestic product have cut interest rates this month, spanning the globe from the euro area and Australia to Kenya and Israel.
In Turkey, Cabinet members led by Minister Caglayan have urged the central bank to accelerate cuts after growth in the $800 billion economy slowed to 1.4 percent in the last quarter of 2012, the lowest level since a 2009 recession. The central bank said yesterday that exports, which are hurt by lira appreciation, are struggling amid weak global demand. Caglayan said rates could come down to as low as 2.5 percent.
Inflation of 6.1 percent last month, the slowest in two years, gave the central bank more room for yesterday’s cut. The bank also reduced its overnight lending rate to 6.5 percent and the overnight borrowing rate to 3.5 percent.
“We should expect further declines in bond rates,” Hakan Aklar, an economist at AkInvest in Istanbul, said by e-mail. “We expect the central bank to cut policy rates to as low as 4 percent and then stop cutting.”
The extra yield investors demand to hold Turkey’s dollar bonds rather than Treasuries plunged 21 basis point to 170 basis points today, according to JPMorgan Chase & Co.’s EMBI Global Diversified index. That compared with an average of 269 for emerging markets, the index showed.
Five-year credit-default swaps fell six basis points to 114, dropping more than half from a year ago. The nation’s risk premium is now on par with Brazil and Israel, and lower than South Africa, Russia or Hungary.
The lira will weaken to 1.87 per dollar by October and 1.88 by the end of 2013, according to currency futures traded in Istanbul.
Finansbank sees room for greater depreciation of as much as 4 percent against the dollar this year, to keep the real effective exchange rate index below 120, Demir said.
Ozan Gaziturk, an economist at Istanbul-based lender Sekerbank TAS, predicted a 3.7 percent drop to 1.89 per dollar, because “the central bank still has the exchange rate in its target.” He said Basci is merely following a global trend.
“Considering that the world’s major economies are in a serious currency war, it’s unlikely that Turkey can act against that,” Gaziturk said.