HSBC Says Turkey Heading for Stagflation as Lira Drops to Record

The Turkish lira weakened to a record and the benchmark stock index fell the most in the world after HSBC Bank AS said the nation risks stagflation as its worst political crisis in a decade hurts consumer sentiment.

The currency depreciated as much as 1 percent to a record 2.2124 per dollar and traded at 2.2095 as of 5:40 p.m. in Istanbul, the fourth day of decreases. The Borsa Istanbul 100 Index retreated 1.9 percent by the close, the biggest decline among 94 global equity gauges tracked by Bloomberg. Yields on two-year lira bonds rose nine basis points to 10.04 percent.

Turkey’s stocks, currency and bonds slid last month after police arrested dozens of suspects in a corruption probe. The lira has lost 8.1 percent since prosecutors started the investigation on Dec. 17, spurring the central bank to pledge the sale of least $6 billion through the end of this month. The regulator’s Monetary Policy Committee convenes on Jan. 21.

“It is obvious that the Turkish economy is heading for stagflation fast,” Fatih Keresteci, a strategist at HSBC in Istanbul, wrote in an e-mailed note today. “The lira’s depreciation may gain pace if the central bank does not change interest rates at the MPC meeting next week.”

The currency’s weakness will help narrow the current-account deficit in 2014, Finance Minister Mehmet Simsek said at a press conference in Ankara yesterday. The deficit widened by 28 percent to $56 billion during the first 11 months of 2013.

Depreciation Pressure

“The lira, despite the sharp fall, is not clearly undervalued, and we expect depreciation pressure to persist,” Barclays Plc analysts including Christian Keller and Durukal Gun in London wrote in an e-mailed note yesterday. “Crucially, the continued political uncertainty seems to have made households turn cautious on Turkish lira,” Barclays said, lowering its forecast for the next 12 months to 2.35 per dollar from 2.14.

Turkish savers added about $20 billion in foreign-currency deposits in the second half of last year, pushing the lira to fresh lows as the conflict between the government and followers of U.S.-based Islamic cleric Fethullah Gulen deepened.

Central Bank Governor Erdem Basci has refrained from raising interest rates to avoid choking economic growth. Statements from ministers signal the policy needs to be changed, HSBC’s Keresteci said, citing Simsek’s comments. “This shows the serious gap between the market perceptions and that of the economy authorities,” he said.

Deutsche Bank AG expects rates to remain the same in January, Henrik Gullberg, a London-based currency strategist at the bank, wrote in e-mailed comments. The lira may weaken to between 2.25 and 2.30 per dollar in two to three weeks, according to Gullberg.

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