The European debt crisis slowing growth in Turkey, the region’s fastest-expanding major economy, is stoking investor expectations that the central bank will find new ways to cut interest rates.
The cost to lock in two-year borrowing costs in liras through interest rate swaps slid 67 basis points this month to 9.45 percent yesterday, the lowest since March 13. Two-year benchmark lira bonds are rallying as yields, while the highest in the developing world at 8.94 percent, fall the most this year after Brazil.
“The Turkish central bank is fundamentally one of the most dovish central banks in emerging markets out there and the only one that can potentially tweak its policy bias on a daily basis,” Benoit Anne, the head of emerging-markets strategy at Societe Generale SA in London, said in e-mailed comments on June 18. “When all the stars are aligned, they will ease aggressively.”
Basci, who sets borrowing costs every day for banks in a range between 5.75 percent and 11.5 percent depending on his view of whether the currency and economic developments need a tighter or looser policy, has lent at the lowest rate for the past 13 days, the longest period in three months. The central bank kept its rates corridor unchanged yesterday, in line with the expectations of all 11 economists in a Bloomberg survey.
Moody’s Investors Service upgraded Turkey’s credit rating to one level below investment grade June 20, citing an improvement in public finances, a well-capitalized banking sector and government steps to reduce the current-account deficit, the world’s second largest behind the U.S.
Turkey sold $1 billion of its longest dated bonds maturing in 2041 on the previous day at a yield of 5.75 percent, taking advantage of falling rates and demand from investors seeking alternatives for Europe’s stagnant economy and deepening debt crisis.
The cost to insure Turkish bonds against default using credit default swaps was unchanged at 237 basis points, down from 293 on Dec. 29 and compared with 231 for Russia, 213 for Poland and 164 for South Africa. The default swaps would pay the buyer face value in exchange for the underlying securities or cash if the country defaulted on its debt obligations. Turkey is rated Ba1 at Moody’s with a positive outlook, one level below investment grade. Russia is rated three levels higher at Baa1. Poland is rated A2 and South Africa is rated A3.
The extra yield investors demand to hold Turkish debt denominated in dollars rather than U.S. Treasuries rose two basis points to 315, according to JPMorgan’s EMBI Global Index. Serbia, whose debt carries the same rating from Standard & Poor’s as Turkey at BB, two levels below investment grade, has a spread of 550 basis points. The average for emerging markets is 382 basis points and emerging Europe 356.
The lira weakened 0.6 percent to 1.8032 per dollar at 6:15 p.m. in Istanbul yesterday. The currency tumbled 6.3 percent in May, its worst month since September, on concern Europe’s debt crisis was worsening. It strengthened 3.5 percent this month.
Yields on Turkey’s 10-year bonds fell to 8.72 percent yesterday, according to a Turk Ekonomi Bankasi index, the lowest since January 2011. Citigroup Inc. and Societe Generale said this week they prefer the 10-year bond over the benchmark two- year as Basci’s daily adjustments to monetary policy make short- term forecasting on interest rates difficult.
The 10-year bond “has held up very well despite recent weakness in the lira and global risk aversion” Esther Law, director of emerging market strategy at Societe Generale in London, said in an e-mailed report June 19. “We still think the bond yield will gradually move lower.”
Turkey, which had the fastest economic expansion in the Group of 20 after China and Argentina last year, reported industrial production growing an annual 2.6 percent in the first four months compared with a 13 percent expansion a year ago. The government forecasts economic growth will slow to 4 percent this year from 8.5 percent last year.
Turkey’s outlook is double Morgan Stanley’s revised 2 percent forecast for U.S. growth published in a report June 19 and quadruple the Bundesbank’s June 8 prediction for a 1 percent expansion in Germany. The European Commission expects the economy of the euro-area, Turkey’s largest trading partner, will shrink 0.3 percent this year. Reports yesterday showed manufacturing in the euro-area contracted at the fastest pace in three years in June.
Turkey’s inflation rate fell to 8.3 percent in May from a three-year high of 11.1 percent in April, the state statistics agency said on June 4, and the current-account deficit narrowed for the sixth straight month, helped by falling oil prices, according to the central bank on June 11. That gives Basci more room to lower rates this summer, according to Isik Okte, chief strategist at Halk Invest, the investment unit of state-run lender Turkiye Halk Bankasi AS.
“We think that a rate cut in either August or September is possible if the lira does not start to move up due to a global risk-off environment,” Okte said in e-mailed comments from Istanbul today. “A 25 percent drop in the Brent crude price strengthened the central bank’s hand immensely.”
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