Bloomberg News

Oil Paves Way for Cuts Giving Yields Room to Drop: Turkey Credit

April 28, 2013

Falling oil prices are giving Turkey’s central bank scope for deeper interest-rate reductions, paving the way for the nation’s bond yields to reach new lows, according to the country’s biggest bank.

Brent crude, the benchmark for two-thirds of the world’s oil, has dropped 13 percent from this year’s closing peak on Feb. 8 to about $103 a barrel as hydraulic fracturing, or fracking, technology opens wells in the U.S. Yields on two-year lira notes fell 31 basis points in the period to a record 5.38 percent on April 26, the sixth-biggest decline among 18 emerging markets tracked by Bloomberg.

Central bank Governor Erdem Basci cited the “favorable course” of oil prices in the minutes from the April 16 meeting, when he reduced the three main interest rates to boost the economy. Falling energy costs, which accounted for 7.6 percent of Turkey’s $787 billion economy last year, may ease pressure on the current-account deficit.

“We can see further interest-rate cuts” after the decline in oil prices, Emre Balkeser, head of trading in Istanbul at Garanti Securities, the brokerage unit of Turkiye Garanti Bankasi AS, the nation’s largest list lender, said in e-mailed comments on April 25. The central bank may cut rates by between 25 basis points and 50 basis points in the next one to two months, he said.

Turkey paid $60 billion for energy imports last year, Deputy Prime Minister Ali Babacan said at a conference in Ankara on April 12. That exceeded the nation’s full-year current- account deficit of $48.9 billion, according to central bank data.

Rate Outlook

Basci lowered the benchmark one-week repo rate for the first time this year in April by 50 basis points to 5 percent. The rate may fall to as low as 3.5 percent by the second quarter of 2014, economists said in a Bloomberg survey published on April 25. Economic growth slowed to 2.2 percent last year from 8.8 percent in 2011.

Two-year interest-rate swaps, which investors use to speculate on borrowing costs, fell 83 basis points this month to 6.15 percent on April 26, the lowest level since Bloomberg records began in 2004.

While the yield on two-year lira notes has fallen 97 basis points in April, headed for the biggest monthly drop since November, the rate is the highest among major emerging markets after Russia, India and Brazil.

Brent Declines

Brent crude rebounded 3.8 percent last week to $103.45 a barrel on April 26 as speculation mounted the European Central Bank will cut rates on May 2. Even after the gain, oil is down 6.3 percent this month, poised for the biggest decline since May. The price will probably rise to $110 in the first quarter of next year, according to the median of 23 estimates in a Bloomberg survey of analysts.

“Lower oil prices are viewed as a positive factor for the country fundamentals, thereby helping appetite for overall lira assets,” Benoit Anne, head of emerging market strategy at Societe Generale SA (GLE) in London, said in e-mailed comments on April 26. “I am going to like the lira but even better Turkey’s local bonds, whose yields are still quite attractive.”

The lira gained less than 0.1 percent to 1.7972 per dollar at 5:50 p.m. in Istanbul on April 26, leaving the currency 0.7 percent stronger this month. The currency will probably end the year at 1.80 against the dollar, according to the median of 24 estimates in a Bloomberg survey.

Default Risk

Five-year credit-default swaps on Turkey rose one basis point, or 0.01 percentage point, to 123, compared with 141 for Russia, ranked one step higher than Turkey at Fitch Ratings. 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 jumped four basis points to 202 on April 26, JPMorgan Chase & Co. (JPM:US)’s EMBI Global Diversified (EXG:US) index showed. That compares with an average of 285 basis points for emerging markets.

“Clearly the main threat for Turkey is the current-account deficit and the decline in oil prices is definitely positive,” Guillaume Tresca, a Paris-based senior emerging-markets strategist at Credit Agricole SA (ACA), said in e-mailed comments on April 26. “Among EMEA countries, Turkish bonds should stand out.”

To contact the reporter on this story: Selcuk Gokoluk in Istanbul at

To contact the editor responsible for this story: Claudia Maedler at

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