Bloomberg News

Lira Posts Worst Stretch of Monthly Declines Since 2001 on Trade

September 30, 2011

Sept. 30 (Bloomberg) -- The lira headed for its fifth straight monthly retreat, the longest stretch of declines since 2001, after the trade gap expanded more than forecast.

The lira slid 0.1 percent to 1.8549 per dollar at 6:43 p.m. in Istanbul. The ISE National 100 share index fell 0.1 percent to 59,693.43, completing its worst quarter since the last three months of 2008. Two-year lira-denominated bonds sank, pushing up yields seven basis points, or 0.07 percentage point, to 8.41 percent, the RBS Istanbul Benchmark Bond Index showed.

Turkey’s trade deficit grew to $8.2 billion from $6.9 billion in August 2010, as stronger consumer demand lifted imports faster than exports, the statistics office said. The shortfall was expected at $7.1 billion, according to the median estimate of eight economists in a Bloomberg survey. The lira is posting the biggest decline in 2011 among 25 emerging-market currencies tracked by Bloomberg after South Africa’s rand.

“The trade deficit data was not good and it is clear it’s not good for the lira,” Benoit Anne, the London-based head of emerging-market strategy at Societe Generale SA, said in an e- mailed response to questions today.

Stocks and bonds extended losses after CNBC news channel reported that Fitch Ratings said Turkey needs sustainable growth for its debt to be raised to investment grade. Turkey’s long- term foreign currency debt is rated BB+ by Fitch, one step below investment grade.

‘Soft Landing’

Fitch needs to see whether Turkey’s economy will have a “soft landing” and the central bank’s monetary policy is right before raising the country’s debt to investment grade, Ed Parker, an analyst, said in a phone interview with Bloomberg from London today after the CNBC report.

Traders are paying close to the most since March 2009 to protect against lira depreciation in the options market. There is a 72 percent chance that the currency will fall to 1.9 per dollar in one month, according to implied probability calculated from currency options.

Turkey’s currency is down 17 percent against the dollar this year, and has lost 13 percent this quarter as the current- account deficit and worsening European debt crisis hurt investor confidence in the nation’s financial stability. The country’s 12-month current-account gap widened to a record $74.6 billion in July, equivalent to about 10 percent of gross domestic product.

Deteriorating Deficits

While the rate of deterioration in the trade and current account deficits is slowing, “I would still argue not at a quick enough pace to suggest Turkey (and the lira) are out of the woods in terms of risks of a further aggressive correction,” Tim Ash, the head of emerging market research at Royal Bank of Scotland Group Plc in London, said in an e-mailed report to clients.

Turkish central bank Governor Erdem Basci said today he wouldn’t welcome further losses for the lira.

The decline in the lira has been “useful and sufficient,” Basci said in a speech in the northwestern city of Edirne today.

The central bank is defending the lira through daily dollar auctions and sold $50 million of the U.S. currency today, for a total $640 million this week. It has sold $3 billion since the auctions started on Aug. 5. Foreign currency reserves, excluding gold, fell by $1.6 billion to $85.6 billion last week. The central bank’s reserves are dwarfed by Russia’s $526 billion in international currency and gold.

Decline May Reverse

The lira may become the best-performer in the Europe, Middle East and Africa region after its recent declines and rebound to 1.60 per dollar by the end of next year, Societe General’s Anne said, adding that the lira hit bottom at around 1.85 per dollar.

The lira is likely to appreciate to 1.67 at the end of next year, according to the median forecast of 10 banks surveyed by Bloomberg. The forecasted total return, including interest, for the lira shows a 22 percent gain by the end of 2012, placing it among the top four emerging-market currencies after the Brazilian real, Indian rupee and Polish zloty, according to data compiled by Bloomberg.

“I am in line with Governor Basci: the lira is fundamentally cheap, and I also believe that the fundamentals are going to improve substantially, in particular with regards to the current account deficit,” Anne said.

The Turkish budget deficit was on track to reach a 2.8 percent of GDP target set for this year, which would bring the debt-to-GDP ratio down to 40 percent, he said.

Policy makers have cut the benchmark interest rate three times since December, by 1.25 percentage points, to help guard the economy from the global slowdown. Turkish GDP expanded 8.8 percent annually in the second quarter, more than economists forecast, compared with India’s 7.7 percent rate.

“Ongoing rapid import growth is not good news for the markets, which were anticipating signs of a deceleration in domestic demand,” Nilufer Sezgin, chief economist at broker Ekspres Invest in Istanbul, said in an e-mail after the data were released.

--Editors: Laura Zelenko.

To contact the reporter on this story: Selcuk Gokoluk in Istanbul at sgokoluk@bloomberg.net Mark Bentley in Istanbul at Mbentley3@bloomberg.net.

To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net


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