Dollar Reserve Burn Rate Swells as Inflows Vanish: Turkey Credit

Turkey’s central bank is depleting its foreign-currency reserves at the fastest pace in at least 12 years to cover the current-account deficit, a trend Gedik Investment says will continue as capital outflows intensify.

Policy makers spent $9.15 billion in the three months through July, compared with $14.7 billion added to reserves in the first four months of the year, according to the latest central bank figures published last week. That’s the biggest drop for a three-month period since at least 2001. Outflows from Turkish bonds reached $2.78 billion since May 22, when the Federal Reserve signaled it was prepared to trim stimulus, sending two-year note yields up by the most in emerging markets.

While developing-nation bonds recovered this month, a resumption of a selloff in Turkey would erode the central bank’s remaining $45 billion of net foreign-currency reserves, according to Ibrahim Aksoy, chief economist at Gedik Investment, the Istanbul-based brokerage. The Fed concludes a two-day meeting tomorrow, when it will decide to trim monthly bond purchases by $10 billion to $75 billion, according to a Bloomberg News survey of economists on Sept. 6.

“With the Fed preparing to reduce asset buying, the central bank will probably continue spending from reserves to close the gap” in the current account, Aksoy said by phone yesterday. “The possibility that reserves will resume growth through portfolio inflows is very thin from now on.”

Lira Depreciation

The three-month decline in reserves was the longest run in about five years, when the Central Bank of Turkey drew down $4.85 billion in the four months to January 2009 amid the global financial crisis. The lira slumped 22 percent against the dollar in that period.

Turkey’s central bank has been selling dollars to stem the depreciation in the lira, which weakened to a record 2.0841 per dollar on Sept. 5. The currency’s 11 percent slide in 2013 makes it the second-worst performer, after South Africa’s rand, among emerging-market currencies in Europe, the Middle East and Africa monitored by Bloomberg.

A pick-up in appetite for emerging markets this month has given some respite to the country’s assets. Turkish government and corporate bonds returned 2.3 percent in September, more than any developing nation in Europe and compared with a loss of 0.2 percent for Russian debt, the Bloomberg USD Emerging Market Composite Bond Index shows.

‘Attractive Levels’

The lira weakened 0.1 percent to 2.0057 per dollar at 1:21 p.m. in Istanbul today, following a 1.2 percent advance yesterday as Lawrence Summers withdrew his bid to become Fed chairman, spurring a rally in emerging markets. Summers, a former Treasury secretary, would tighten Fed policy more than Janet Yellen, who was his main rival to replace Chairman Ben S. Bernanke, according to a Bloomberg Global Poll last week.

The premium investors demand to own Turkish debt over U.S. Treasuries climbed three basis points, or 0.03 percentage point, to 282 at 1:21 p.m. in Istanbul, according to JPMorgan Chase & Co indexes. That compares with a 2013 low of 160 on Jan. 3.

“The possibility that capital outflows won’t be as sharp from now on can’t be ruled out,” Nilufer Sezgin, chief economist at Erste Securities in Istanbul, said by phone yesterday. “Yields have increased to attractive levels, which may trigger renewed investor interest. In addition, exports may accelerate faster than expected, which would help the current account and mitigate pressure on the lira and economic growth.”

Currency Reserves

The yield on Turkey’s benchmark two-year notes advanced 18 basis points to 8.92 percent in the biggest jump on a closing basis since Aug. 26. The rate is 4.13 percentage points above its May 17 record low.

The lira has strengthened 1.5 percent since central bank Governor Erdem Basci pledged on Aug. 27 that policy makers won’t raise the overnight lending rate -- the upper end of a three-pronged rates corridor -- above 7.75 percent to defend the currency.

“Central bank reserves are enough to reduce short-term volatility,” Tevfik Aksoy, the head of central and eastern europe, Middle East and Africa economics at Morgan Stanley in London, said by e-mail yesterday. “But the use of foreign-currency reserves isn’t sustainable, unless the bank uses the interest-rate weapon.”