Lira Election Rally Seen Over at Best Forecaster: Turkey Credit

The Turkish lira’s post-election rally is over as investors shift their focus from Prime Minister Recep Tayyip Erdogan’s victory last month to companies needing to repay their foreign-currency debts, the top forecaster said.

The currency will slip 1.7 percent in the second quarter and end the year little changed, according to Przemyslaw Kwiecien, chief economist at X-Trade Brokers Dom Maklerski SA in Warsaw, the most accurate analyst of the lira in the first three months of 2014. While the lira has risen 3.2 percent since the March 30 vote, it remains 15 percent lower over the past 12 months, boosting corporate debt-servicing costs, he said.

The weakened currency is weighing on Turkish businesses, which owed a net $198.3 billion of non-lira debt as of February, central bank data show. While political unrest has calmed since a graft probe targeting the government erupted in December, Turkey’s economic growth is still predicted to decelerate to 2.3 percent this year from 3.9 percent in 2013, according to economist forecasts surveyed by Bloomberg.

“The economy is going to slow down and those indebted in U.S. dollars will have problems on the revenue side,” Kwiecien said in a phone interview on April 14. “The pressure on the lira may reappear because fears that those dollar debts won’t be repaid will return.”

Borrowing Surge

While Turkey’s per-capita income has more than doubled to $10,782 since Erdogan came to power in 2003, the growth has been increasingly dependent on surging private debt. Corporate and consumer borrowing jumped to 67 percent of gross domestic product in 2013 from 33 percent in 2008, before the Federal Reserve began buying debt for its quantitative-easing program.

Turkish companies’ foreign-exchange borrowings surged from $39.4 billion at the end of 2002 to $152 billion six years later and $169.6 billion at the close of 2012, central bank data show.

The lira has averaged 1.54 per dollar since Erdogan became prime minister, reaching a seven-year high of 1.1491 in January 2008. It touched a record-low 2.3900 on Jan. 27 this year, prompting the central bank to more than double its benchmark interest rate to 10 percent after an emergency meeting the following day.

The currency will weaken to 2.24 per dollar in the second quarter and will end the year at 2.25, according to the median of 26 estimates compiled by Bloomberg. It appreciated 0.6 percent to 2.1243 per dollar at 5:16 p.m. in Istanbul, advancing for a second day.

‘Financial Distress’

Technical indicators point to further near-term weakness for the lira. The daily moving average convergence-divergence, or MACD, which provides buy and sell signals, is poised to turn more bearish. The currency’s five-week rally stalled near 2.0841, the September 2013 low, from where the lira began its recent decline.

“We have no doubt that some companies will be facing very significant financial distress and some might not be able to roll their obligations, leading to company failures or defaults,” Tevfik Aksoy, chief economist for Europe, Middle East and Africa at Morgan Stanley, wrote in an e-mailed note on April 11. “Many companies borrowed externally to take advantage of the quantitative easing.”

Morgan Stanley predicts the lira will weaken to 2.30 per dollar in 2014. Goldman Sachs Group Inc. expects a drop to 2.50 in the next 12 months.

‘Political Tension’

The Fed cut the pace of asset purchases to $55 billion a month at its last meeting March 19, its third consecutive reduction, from $85 billion in November. The central bank said rates would remain low for a “considerable time” after it ends its bond-buying program, even as the economy strengthens. U.S. industrial production rose more than forecast in March after a February gain that was twice as big as previously estimated, a report showed yesterday.

Turkish inflation accelerated to 8.4 percent in March, exceeding the 8.1 percent median estimate in a Bloomberg survey, while producer prices jumped an annual 12.3 percent, according to data released this month. Unemployment increased to 10.1 percent in January.

While markets have rallied since Erdogan strengthened his grip on power on March 30, weakness may resurface before voters return to the polls in August to elect a president, according to Lars Christensen, chief emerging-market analyst at Danske Bank A/S in Copenhagen and the third most-accurate lira forecaster.

“I am not overly optimistic on the lira in the medium term,” he said by phone yesterday, predicting the currency will weaken to 2.20 in the fourth quarter. “I am a little worried that in the next couple of months, we can see more pressure on the lira. Political tension can heat up again before the presidential election.”

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