Erdogan’s 2013 a Tale of Two Halves for Investors: Turkey Credit

For investors in Turkish assets, 2013 has been a tale of two halves.

Seven months ago, yields on two-year notes fell to a record after Moody’s Investors Service raised Turkey’s credit rating to investment grade. Now, a worsening current-account deficit, the prospect of less U.S. stimulus and a corruption scandal ensnaring four ministers have sent borrowing costs to their highest in more than three months and the currency toward a record low against the dollar.

“Both the tapering story and local developments are against Turkey for now,” Cristian Maggio, an emerging-market strategist at Toronto-Dominion Bank in London, said by e-mail yesterday. “For global investors what counts most is political and institutional stability that would lead to high sustainable growth rates.”

Yields on 10-year bonds extended their gain to 10.12 percent today, the most since reaching a three-year high on Sept. 3, after the Federal Reserve said Dec. 18 it will cut its bond-purchase stimulus program. That marked the beginning of the end of a policy that boosted asset prices as it spurred record capital inflows to emerging markets.

The government projects the current-account deficit will widen to 7.1 percent of gross domestic product for 2013 from 6.1 percent a year earlier. When the gap jumped to a record 10 percent in 2011, the lira tumbled 18 percent, the world’s biggest drop.

Police Probe

“Turkey is one of the countries we’re more concerned about,” Paul McNamara, who helps manage $7.5 billion in emerging-market debt at GAM Investment in London, said by e-mail yesterday. “The external-balance recovery is very questionable” as the monthly current-account deficit has deteriorated year-on-year since April.

Prime Minister Recep Tayyip Erdogan turned the tables on a corruption investigation targeting his party this week, vowing to reveal a “state within a state” and purging about 50 police commanders.

Istanbul chief Huseyin Capkin was among those dismissed yesterday, ending his term after 4 1/2 years, according to the state-run Anatolia news agency.

Stock Market

Deputy Prime Minister Bulent Arinc told reporters in Ankara two days ago that four cabinet ministers are implicated in the probe into corruption. A criminal court in Istanbul has ordered the confiscation of assets belonging to suspects including the sons of Interior Minister Muammer Guler and Economy Minister Zafer Caglayan, Hurriyet said yesterday.

The Borsa Istanbul National 100 Index has fallen 7.7 percent in the past three days, and is down almost 12 percent since the end of last year. It’s declined 26 percent since Fed Chairman Ben S. Bernanke first discussed tapering on May 22.

The lira weakened to 2.0924 against the dollar at 1:50 p.m. in Istanbul today, when it reached new record lows against both the dollar and euro.

The Turkish currency has fallen 15 percent against the dollar this year, the biggest decline among major emerging-market currencies in Europe, the Middle East and Africa apart from the South African rand. The two-year note yield rose 25 basis points today to 9.61 percent, up from a record 4.79 percent on May 17.

Lira Trend

The lira’s drop gathered pace and bond yields jumped after protests against Erdogan’s government erupted on May 31, when police tear-gassed opponents of plans to redevelop Gezi Park near Taksim Square in Istanbul. Six people died, with hundreds more injured, as the unrest spread across the country in June.

At the central bank’s monthly policy meeting this week, Governor Erdem Basci maintained the one-week repurchase rate at

4.5 percent and held the upper and lower bands of his rates corridor at 7.75 percent and 3.5 percent, respectively.

Basci’s reluctance to raise rates, coupled with a “realization that global interest rates will have to be higher,” changed the direction of Turkish markets, according to Tatha Ghose, senior emerging-market economist at Commerzbank AG.

“If overnight lending was 10 percent and repo 5.5 percent, there would be no problems whatsoever,” Ghose said.

The extra yield investors demand to hold Turkish dollar-denominated debt over U.S. Treasuries fell yesterday by six basis points, or 0.06 percentage point, to 283 basis points, according to JPMorgan Chase & Co. indexes. The cost to insure Turkish debt against default using credit-default swaps rose one basis point to 206.

“From love to hate is one step,” Dmitri Barinov, who helps oversee $2.5 billion of debt at Union Investment Privatfonds, said by e-mail yesterday. “Growth rates of the Turkish economy were higher than the emerging-market average and people really loved the story. But flow drives the market and it is still out.”

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