Lira Yields Failing to Tempt Savers Piling Into Dollars

The third-highest local-currency yields aren’t enough to lure Turks, who are putting record amounts of cash into dollar deposits on concern the lira is vulnerable in the run-up to presidential elections.

Money held in dollar accounts rose to $82.6 billion on May 16, the most since the central bank began publishing the data in December 2012. Yields on 10-year lira bonds reached 8.97 percent today, topped only by Pakistan and Brazil in major emerging markets tracked by Bloomberg show.

Lira volatility is rising from this year’s low last month amid speculation that Prime Minister Recep Tayyip Erdogan, who battled national protests and fended off corruption allegations in the past year, will run in the nation’s first direct presidential poll in August. While U.S. yields are 6.63 percentage points lower, there’s a history of Turkish depositors switching into dollars at such times, said Nigel Rendell at Medley Global Advisors.

“In times of uncertainty people hold dollars,” Rendell, a senior analyst at Medley, said by e-mail from London June 3. “It has been a turbulent 12 months in Turkey and there are still ongoing uncertainties,” including the presidential election, he said.

Tax Relief

Erdogan’s government is moving toward a more populist fiscal stance, submitting a bill to parliament to provide relief on overdue taxes and erase unpaid cigarette-smoking related fines. He has repeatedly called on the central bank to cut interest rates even as inflation is running at about twice the central bank’s 5 percent target.

Central bank Governor Erdem Basci reduced the benchmark repurchase rate by 50 basis points last month after more than doubling it to 10 percent in January, when the lira slumped to a record low.

“What we can say with certainty is that local investors have not flooded back to the lira,” Manik Narain, a strategist at UBS AG in London, wrote in e-mailed comments on June 3. This reflects investors’ concerns about inflation, fiscal discipline and the political situation, he said. It’s “hard to see any fundamental value in the currency,” he said.

The lira appreciated 0.5 percent to 2.1047 at 5:01 p.m. in Istanbul, extending its gains over the past three months to 4.7 percent. The currency has sunk 27 percent in the past five years, the biggest depreciation in emerging markets after the Argentine peso.

Election ‘Nervousness’

Yields on two-year benchmark notes declined for the first day in three, dropping 24 basis points to 8.28 percent.

The shift by local investor to dollars “signals nervousness on the election,” Koon Chow, the London-based head of emerging-market strategy at Barclays Plc, said in e-mailed comments yesterday. “Foreign investors have become inured to the political developments in Turkey and have concluded that despite the developments of the past 13 months, macro policy has not changed significantly.”

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