Bloomberg News

Lagging Lira Seen Gaining on Turkish Post-Election Rate Rise

June 09, 2011

(Updates figures, adds lira trade)

June 9 (Bloomberg) -- The lira, the worst-performing emerging-market currency the past six months, may lead gains as Turkey’s biggest inflation surge in a decade forces policy makers to increase rates from record lows after this weekend’s election, according to analysts surveyed by Bloomberg.

Turkey’s currency will gain 4.5 percent to 1.51 per dollar by the end of the third quarter, the median of 20 estimates on Bloomberg shows, beating forecasts for all 23 developing-nation currencies. The average forecast rose from 1.535 a month ago.

The central bank kept borrowing costs at a low of 6.25 percent even as Brazil raised rates five times in the past year and India increased seven times. Turkish policy makers may boost the interest rate to 6.5 percent in the third quarter, 7 percent in the fourth quarter and 8.75 percent by October 2012 after inflation jumped to an annualized 7.2 percent from 4.3 percent last month, according to the median estimate in Bloomberg surveys of 15 banks. Prime Minister Recep Tayyip Erdogan’s governing party is leading polls before the June 12 vote.

“I expect a rate hike after the elections,” Mete Tuncel, who helps manage $1.65 billion as a partner at Emerging Sovereign Group in New York, said in e-mailed comments. “I don’t know how much of an increase the government would permit, but probably they would permit a 50 basis-points increase.”

Options traders are becoming less bearish on the lira, paying 2.01 percentage points more for the right to sell the lira than to buy it, down from a three-month high of 2.5 percentage points on May 25, the so-called one-month risk reversal rates show.

The currency headed for its strongest close in almost a week at 1.578 per dollar in Istanbul today.

Falling Rates

Falling interest rates helped drive the lira down 4.4 percent in the past six months, the worst performance among emerging-market currencies tracked by Bloomberg.

The lira tumbled as central bank Governor Erdem Basci cut interest rates by 75 basis points, or 0.75 percentage point, between December and January and left rates unchanged at 6.25 percent since then. Basci has restricted bank lending as a tool to fight inflation and prevent demand for imports deepening the current account deficit. Reserve requirements have increased 10 percentage points since December to reduce the amount banks have available to lend.

The bank raised its inflation forecast for 2011 to 6.9 percent on April 28 from 5.9 percent, citing higher oil prices and taxes on textiles. The forecast assumes “limited tightening” of monetary policy in the second half and loan growth of 20 to 25 percent, Basci said.

‘More Hawkish’

Turkey’s current-account deficit, forecast by the government at $39.3 billion or 5.4 percent of gross domestic product this year, reached $60.5 billion in the 12 months through March as growth boosted demand for imports.

“The central bank will sound more hawkish and start preparing markets for key rate hikes,” Lan Nguyen, a currency strategy analyst at Commerzbank AG in Frankfurt, said in e- mailed comments. “This will bring some relief for the lira as the unconventional monetary policy has been weighing on the currency since December last year.”

The central bank’s twice-monthly expectations survey on June 8 showed for the first time since February that companies and financial institutions expect a rate increase in the next three months to 6.50 percent.

Nordea Bank AB, the biggest lender in the Nordic region, raised its lira forecast to 1.48 per dollar from 1.56 on May 27.

Policy Mix

“Despite the central bank’s firm belief in its policy mix, we still think a surprise hike in the benchmark rate of 50 basis points is possible in July,” Elisabeth Andreew, a strategist at Nordea Bank in Copenhagen wrote in a research note on June 6.

Commerzbank, based in Frankfurt, revised its lira outlook downward on June 6, predicting central bank efforts to slow the economy will fail and the current account deficit will jump to 9 percent of GDP.

Turkey’s credit rating may come under pressure should the government have difficulty financing the current-account gap, Moody’s Investors Service said on June 6. Moody’s ranks Turkey at Ba2, two levels below investment grade, with a positive outlook. Standard & Poor’s rates the country an equivalent BB, also with a positive outlook, and Fitch Ratings has a BB+ ranking, one step below investment grade.

Budget Gap

“We think that the likelihood of a Turkish upgrade in 2011 is significant if the Turkish authorities deal with the current account deficit issue,” said Guillaume Tresca, an emerging- market strategist at Credit Agricole CIB in Paris, adding that Turkish bonds look “attractive”.

Erdogan’s governing party had 49 percent backing in a June 1 survey by Istanbul-based Konsensus Arastirma. His popularity has been helped by the second-fastest economic growth rate after China among the Group of 20 major economies, at 9.2 percent in the fourth quarter.

“We expect a modest equity rally after the June 12 elections if the AKP does not win by a landslide,” Morgan Stanley

The government plans to lower the budget deficit to 2.8 percent of GDP from 3.6 percent last year. The International Monetary Fund sees the Turkish shortfall at 1.7 percent this year, below Germany’s 2.3 percent, France’s 6 percent and the U.K.’s 8.6 percent.

Stock Gains

Since Erdogan’s Justice and Development Party won power in 2002, output per capita has almost tripled, exceeding $10,000 last year, according to the Treasury. The benchmark ISE-100 stock index has jumped more than sixfold in dollar terms -- almost twice the gain on the MSCI Emerging Market Index -- and yields on benchmark lira bonds have dropped to about 9 percent, from above 50 percent, data compiled by Bloomberg show.

“On the fiscal side, the government has been doing very very well,” said Koon Chow, a London-based strategist at Barclays Capital, which increased its lira forecast to 1.62 from 1.63 on May 30. “It has been helped by incredibly strong growth, strong tax revenues but at the same spending has been relatively contained. The economy is in solid shape, there is no reason to spend more.”

--With assistance from Ye Xie in New York. Editor: Gavin Serkin

To contact the reporter on this story: Selcuk Gokoluk in Istanbul at

To contact the editor responsible for this story: Gavin Serkin at

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