Bloomberg News

Yield Curve Steepest in Two Years on Growth Bets: Turkey Credit

February 24, 2013

Investors have driven the yield spread between Turkey’s two-year and 10-year lira notes to the highest in two years on speculation that the central bank’s balancing act will tilt toward growth.

The spread, also known as the yield curve, widened to 133 basis points on Feb. 21, the steepest since February 2011. Then, Turkey’s growth rate exceeded China’s and inflation jumped to 10.5 percent by year-end. The 10-year yield rose to 6.99 percent on Feb. 22, 17 basis points above Russian debt due in July 2022, and up from a record low of 6.53 percent on Dec. 18.

The jump indicates investors are pricing in growth-driven inflation risk as Prime Minister Recep Tayyip Erdogan says Turkey’s economy needs to “fly” after the central bank engineered a slump last year by depressing loan growth. Bank Governor Erdem Basci cut two of his three main interest rates on Feb. 19, saying he was also tightening lenders’ reserve-rate requirements to offset any unwanted credit growth.

“There is huge political pressure on the central bank,” Murat Gulkan, head of Unlu Portfolio Management, an Istanbul- based asset management company, said in e-mailed comments on Feb. 22. “Credit growth is back above 20 percent, inflation is going to stay high and the current-account gap is going to widen as growth picks up.”

Meeting Target

Turkey’s gross domestic product probably expanded less than 3 percent last year as Basci depressed lending to rein in the current-account deficit, Finance Minister Mehmet Simsek told NTV television on Feb. 20. This year the government will “comfortably” meet its 4 percent growth goal, he said.

The government’s 2013 target matches the median estimate of 23 economists surveyed by Bloomberg and compares with 8.5 percent growth in 2011 and 9.2 percent in 2010.

The yield on two-year notes has fallen 50 basis points this year as the central bank lowered its overnight lending and borrowing rates twice by a total of 50 basis points each to boost the economy while leaving its benchmark repo rate unchanged.

At the last rate meeting on Feb. 19, the bank increased reserve requirements on lira liabilities to 11 percent from 10.8 percent and on foreign currency liabilities to 11.5 percent from 11.1 percent, citing “significant acceleration” in credit growth and saying the moves would withdraw about $2 billion in liquidity from the market.

Balancing Act

“This is in fact a balancing act, and a difficult one,” Sertan Kargin, chief economist at Eczacibasi Securities in Istanbul, said by e-mail on Feb. 22. The rate cuts and Simsek’s “growth-friendly” remarks prompted investors to drop longer- term debt while maintaining “bullish exposures at the short end,” he said.

Basci introduced an interest-rate corridor in October 2011 that allows him to vary rates daily to control inflation and lending, stabilize the lira and reduce the current-account deficit. Turkey’s currency tumbled 18 percent against the dollar that year, the biggest drop worldwide, as the shortfall swelled to $77.1 billion, or about 10 percent of GDP.

While Basci’s monetary policy has reined in the current- account gap, his limits on lending have restricted a driver of economic growth. Last year’s slowdown coincided with a loan growth of about 15 percent, while 2009’s economic contraction coincided with credit growth of 6.8 percent. In 2010 and 2011, lending grew 30 percent and 34 percent and GDP expanded 9.2 percent and 8.5 percent, respectively.

Controlled Expansion

Loan growth was 19 percent in the year to Feb. 8, according to the latest data on the state statistics agency’s website. Both the government and central bank are targeting 15 percent growth rates.

The government will take necessary steps to restrict loans and achieve a “controlled” expansion, Deputy Prime Minister Ali Babacan said in televised comments from Istanbul on Feb. 22. About half of Turkish growth this will come from domestic demand and the other half from exports, he said.

State-run Turkiye Vakiflar Bankasi TAO (VAKBN) will probably expand its loans by 17 percent, CEO Suleyman Kalkan said in an interview with CNBC-e television on Feb. 21. Akbank TAS (AKBNK), the bank part-owned by Citigroup Inc., will increase lending at an average pace of 20 percent annually between 2013 and 2015, CEO Hakan Binbasgil said in a presentation in Istanbul on Feb. 12.

More Curbs

Increased lending may prompt policy makers to take further action against the banks, according to Mariya Gancheva, a credit strategist at Mitsubishi UFJ Securities in London.

“If the central bank is so obsessed with controlling lending and keeping it at 15 percent, then why does every single bank plan to grow by 17 percent to 20 percent?” Gancheva said by e-mail on Feb. 22. “These massive accelerations have always been penalized, so they will get a slap soon.”

The lira fell 0.3 percent to 1.8002 against the dollar at 7 p.m. in Istanbul on Feb. 22.

Five-year credit-default swaps on Turkey rose two basis points to 142. That’s less than the cost of 149 for Russia and 171 for South Africa, though both nations have better credit ratings. Rising prices indicate worsening perceptions of creditworthiness. The contracts pay the buyer face value in exchange for the underlying securities or cash equivalent if a borrower fails to adhere to its debt agreements.

The extra yield investors demand to hold Turkey’s dollar debt over U.S. Treasuries jumped five basis points, or 0.05 percentage point, to 209, according to JPMorgan Chase & Co.’s EMBI Global Diversified Index. Turkey’s spread is 76 basis points below the average for emerging markets, compared with a discount of 89 at the end of last year.

While the central bank’s rate cuts were intended to deter so-called hot money inflows, the reserve requirements were meant to offset any stimulative effect those cuts might have on lending, Tim Ash, chief emerging market economist for Standard Bank Group Ltd., said in e-mailed comments from London Feb. 21.

“This is a central bank that loves to tweak its policy tools,” Ash said. “I fear they are still perhaps trying to do too much. The central bank might be forced to move to tighten policy by hiking policy rates in a more orthodox fashion.”

To contact the reporter on this story: Benjamin Harvey in Istanbul at

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

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