Bloomberg News

Barclays Top Lira Analyst Sees Bond Rally Fading: Turkey Credit

April 19, 2013

Turkey’s widening current-account deficit and record low yields will weaken the lira over the next three months, slamming the brakes on this year’s bond rally, according to Barclays Plc (BARC), the top forecaster for the currency.

The lira will depreciate 4 percent to 1.87 per dollar, Koon Chow, an emerging-market strategist at Barclays in London, said by phone two days ago. The currency has outperformed all emerging-market peers in Europe this year except for the Romanian leu, spurring a 60 basis-point decline in two-year yields, the third-biggest drop among major emerging markets tracked by Bloomberg.

The country’s current-account gap widened to $5.13 billion in February from $4.25 billion a year earlier, the first annual increase since October 2011. The central bank took unprecedented steps in the past week in a bid to support the economy and limit lira gains, lowering its three main interest rates, as the International Monetary Fund cut its global growth forecast.

“I am concerned about inflows because the global economy seems to going into another weakening patch,” Chow said. “It is going to leave the lira moderately vulnerable because the current-account deficit is now widening. Yields may go up a little bit.”

Turkey’s currency declined less than 0.1 percent to 1.7969 per dollar at 3:27 p.m. in Istanbul today, paring this week’s advance to 0.5 percent.

Weakening Bias

Bank of America (BAC:US) Corp., the second best lira forecaster in the 12 months through March 31, is predicting the currency will weaken to 1.88 per dollar in the third quarter and 1.90 in the last three months of the year. That compares with median forecasts of 1.81 for the third quarter and 1.80 for fourth in a Bloomberg survey 25 analysts.

“The central bank is helping keep the lira with a mild weakening bias and we don’t expect this to change,” Arko Sen, debt and fixed-income strategist at Bank of America in London, said in an e-mailed comment two days ago.

Turkey’s central bank cut its one-week repo rate for the first time this year on April 16, reducing it by 50 basis points, more than analysts anticipated, to a record 5 percent. It also lowered the overnight lending and borrowing rates, citing accelerating capital inflows and loan growth above its 15 percent target at about 19 percent.

Lending growth of 25 percent helped fueled demand for imports in 2011, swelling the current-account gap to a record $77 billion, the most worldwide after the U.S.

Falling Yields

Bond yields dropped 21 basis points, or 0.21 percentage point, in four days to 5.54 percent today, the lowest since Bloomberg started tracking the data in 2005. Yields have fallen 56 basis points over the past month, the biggest decline among 19 emerging markets.

“In the near term we still see some downside for bond yields though the significant part of the move has already happened,” Sen said.

Foreign investors poured $16 billion into Turkish bonds last year, driving two-year yields down 483 basis points, the most among emerging markets and strengthening the lira 6 percent. They added another $1.8 billion in the week ending April 12, raising total foreign holdings to a record $68.5 billion, according to central bank data released on April 18.

Rating Outlook

Standard & Poor’s raised Turkey’s debt rating last month to BB+, equivalent to its ranking from Moody’s Investors Service and one step below investment grade, citing movement toward a Kurdish settlement, a rebalancing of the economy and resilience to potential shifts in capital inflows. Moody’s held out the prospect of an upgrade on April 11, citing government efforts to end the 30-year conflict with Kurdish militants.

Moody’s has a positive outlook for Turkey, while S&P’s outlook is stable. Fitch Ratings lifted Turkey to investment grade in November, the country’s first such ranking in 18 years.

The lira will probably strengthen to 1.75 against the dollar, according to Swissquote Bank, the most bullish call among 25 banks, based on data compiled by Bloomberg.

“A potential rating hike is not too far,” Ipek Ozkardeskaya, a currency strategist at Swissquote Bank in Geneva, said in e-mailed comments yesterday. “The deepening euro-zone crisis should also trigger capital flight to Turkey if financial stability is properly promoted.”

Default Risk

Credit-default swaps declined one basis point to 127 points today, compared with 150 for Russia, rated three steps higher than Turkey at Moody’s. The contracts, which increase as perceptions of creditworthiness deteriorate, 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.

The extra yield investors demand to hold Turkey’s dollar bonds rather than U.S. Treasuries fell two basis points to 205 today, JPMorgan Chase & Co. (JPM:US)’s EMBI Global index showed. That compares with an average of 287 basis points for emerging markets.

The central bank “cut rates in anticipation of more short- term capital inflows,” Barclays’s Chow said. “However, the capital inflows will only be increasing gradually over time, and in the next three months we will have a period when they will actually slow.”

For Related News and Information:

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

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


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