Bloomberg News

Basci Signals Rate Cuts as Growth Outlook Worsens: Turkey Credit

August 27, 2012

Turkey’s central bank is lending at the cheapest rates in nine months after saying the economy may be slow to recover from the lowest growth rate in three years.

Borrowing costs for the country’s banks were 6.43 percent yesterday, the lowest since Nov. 21 and down from an average 8.5 percent this year, according to data compiled by Bloomberg. Cheaper central bank lending helped bring benchmark two-year yields 79 basis points lower this quarter to 7.68 percent, the biggest drop among 13 major emerging markets, the data show.

Central bank Governor Erdem Basci began varying rates daily between the benchmark of 5.75 percent and as high as 12.5 percent in October amid concerns Turkey’s $770 billion economy, the biggest in eastern Europe behind Russia, was overheating after average growth of 8.9 percent in the past two years. Now the bank is “slowly taking its foot off the brakes” after the economy cooled and risks of external growth shocks are increasing, Basci told reporters in Ankara on Aug. 25.

“Global growth concerns are resurfacing, and the central bank’s warning about the growth rate is the local end of the global phenomenon,” Mehmet Besimoglu, chief economist at Istanbul-based Oyak Securities, said in a telephone interview yesterday. “The central bank is signaling quite clearly that they’re going to cut the upper rate of the interest rate corridor in their September meeting, and that they will continue to provide more liquidity at cheaper rates to boost the economy.”

Slowing Growth

Turkey’s economy contracted 0.4 percent in the first quarter from the previous three months, the first time it shrunk since 2009, and loan growth in July was 17 percent, the lowest since 2010. The International Monetary Fund expects GDP growth to slow to 3.2 percent this year from 8.5 percent last year, which was the fastest pace among Group of 20 countries after China and Argentina.

“It’s not going to be possible for Turkey to grow at 8 or 9 percent as it did in the past two years,” Basci said in the meeting with reporters on Aug. 25, according to the government- run Anatolia news agency. “Since July we’ve been lowering the average cost of funding and in the next stage, we’ll slowly bring the cost of credit down.”

The average cost of central bank funding to banks was 6.85 percent in August, compared with 8.05 percent in July, according to data compiled by Bloomberg. Rates that banks charge customers on loans have remained little changed however, which may have prompted the bank to more clearly state its intention to lower rates over the weekend, according to Isik Okte, chief strategist at Halk Invest in Istanbul.

Borrowing Costs

The average cost of a personal loan was 17.7 percent on July 20, according to the latest data compiled by Bloomberg. For business loans it was 14.5 percent, for vehicle loans 13.5 percent and for home loans 12.3 percent, the data show.

“A lot of businesses are not spending because bank rates are too high and a lot of individuals are tapering off spending because car loan rates and mortgages are still very expensive,” Okte said in response to e-mailed comments yesterday. “Right now growth is being financed by a huge jump in net exports, but internal demand is not keeping up -- the central bank sees this, and they want internal demand to increase.”

Exports grew 17 percent yearly in June to $13.3 billion while imports shrank, the statistics office in Ankara said on its website on July 31.

Yields Fall

Yields on benchmark two-year lira-denominated bonds fell 13 basis points to 7.68 percent yesterday, extending this year’s decline to 333 basis points. The lira weakened 0.1 percent to 1.7998 per dollar at 6:25 p.m. in Istanbul, paring this year’s gain to 5.1 percent. The lira was the world’s worst-performing major currency last year with an 18 percent decline.

The extra yield investors demand to own Turkey’s dollar- denominated sovereign bonds rather than U.S. Treasuries increased two basis points to 237 yesterday, JPMorgan Chase & Co.’s EMBI Global index shows. The average spread for developing-nation debt rose one basis point to 319.

Credit-default swaps on Turkey, rated BB, the highest non- investment grade at Moody’s Investors Service and Fitch Ratings Ltd., rose two basis points, or 0.02 percentage point, to 181 on Aug. 24, according to data compiled by Bloomberg. That compares with 164 for Russia, 157 for Poland and 146 for South Africa. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements. Banks were closed in London yesterday for a holiday.

Global Stimulus

Basci may be able to cut this year without risking the rapid depreciation in the currency that Turkey saw last year as global central banks will probably begin cutting rates in tandem to spur growth, according to Besimoglu at Oyak.

U.S. Federal Reserve Bank of Chicago President Charles Evans urged the central bank to begin a third round of bond purchases in a speech in Hong Kong today. China’s Premier Wen Jiabao called for extra measures to support exports and help meet economic targets, Xinhua News Agency said Aug. 25. European Central Bank President Mario Draghi may give further hints on policy at the Fed’s symposium in Jackson Hole, Wyoming, Sept. 1.

“Since the big global central banks are going to start easing, the local action will be more comfortable,” Besimoglu said. “They’re signalling that they’re going to be easing as long as they can.”

To contact the reporter on this story: Benjamin Harvey in Istanbul at bharvey11@bloomberg.net

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


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