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Goldman Wins Bucking Consensus on Call for Cuts: Turkey Credit

January 22, 2013

Goldman Sachs Group Inc.’s non- consensus call that Turkey’s central bank would act to stem capital inflows at the risk of higher loan growth was vindicated as the bank cut interest rates today.

The Ankara-based bank lowered its overnight lending and borrowing rates by 25 basis points each, while leaving the 5.5 percent benchmark one-week repurchase rate unchanged, in line with Goldman Sachs economist Ahmet Akarli’s call on Jan. 18. The reductions were made to “contain risks on financial stability” amid accelerating capital inflows that have boosted the lira and helped prolong the best bond rally in emerging markets.

Akarli was the only one of 12 economists surveyed by Bloomberg to correctly predict today’s move, with the median forecast calling for no change in rates as rising loan growth threatens to increase the inflation rate and widen the current- account deficit. The central bank’s priority last year was to limit lending growth that had exploded in 2011, driving the deficit up and leading to an 18 percent decline in the lira against the dollar.

“The bank has shifted focus towards the financial stability risks posed by accelerating capital inflows, and away from inflation,” Akarli, who was not immediately available for comment today, said in an e-mailed note before the rates decision. Interest-rate cuts “will be used to lean against these inflows and their subsequent currency appreciation pressures,” he said.

Credit Rating

Accelerating inflows meant “the proper policy would be to keep interest rates at low levels” and to deliver “a limited downward shift in the interest rate corridor,” the central bank said in a statement accompanying its rate cuts.

The interest-rate corridor is a policy tool unique to Turkey, allowing central bank Governor Erdem Basci to adjust the effective borrowing rate daily by extending funding through a duo of rates. At today’s meeting he cut the overnight borrowing rate to 4.75 percent and the overnight lending rate to 8.75 percent.

The lira appreciated against 27 out of 31 major currencies this month, according to data compiled by Bloomberg. That brought the central bank’s real effective exchange rate close to the 120 reading which Basci said in November would be a cause for concern. The index measures the lira’s purchasing power against the currencies of Turkey’s main trading partners.

Lira Gains

The lira strengthened to 1.7530 per dollar on Jan. 17, the strongest level since Feb. 29 last year, on bets Moody’s Investors Service will raise Turkey’s credit rating to investment grade. Barclays Plc, Societe Generale SA and Morgan Stanley are among banks that have said Moody’s may upgrade Turkey this year, a move that would help include the country in more global bond indexes and generate additional investment flows, after Fitch Ratings raised government debt to investment- grade ranking in November.

Moody’s today said it was scheduling a teleconference on Jan. 28 to discuss Turkey’s “strengthening profile” and shift “closer to an investment grade sovereign rating.”

The lira dropped 0.4 percent to 1.7719 at 6:55 p.m. in Istanbul after the rate cuts, erasing as much as 0.3 percent of gains on the Moody’s announcement. Yields on two-year benchmark bonds dropped three basis points to 5.9 percent.

Credit Expansion

Excessive currency appreciation increases “systemic risk and can have a damaging effect on macroeconomic and financial stability,” Basci said Dec. 25. The governor has used the rates corridor to control the flow of money and curb the current- account deficit.

The central bank wants to keep credit growth within a 14 percent to 15 percent range, Deputy Governor Turalay Kenc said during a roundtable discussion arranged by Euromoney Institutional Investor Plc (ERM) in Vienna Jan. 15. Bank loans grew 17 percent to 805 billion liras ($457 billion) in the 12 months to Jan. 11, according to data from the banking regulator yesterday.

“We think that the cut in the upper end might support overall economic activity, which was not necessarily needed since economic activity already started to gain momentum,” Ozgur Altug, chief economist at brokerage BGC Partners in Istanbul, said in an e-mailed report today. “The central bank’s signal via cutting the lower end hints that it will not allow the lira to become an overvalued currency.”

Real Rate

Five-year credit-default swaps on Turkey were unchanged at 126 basis points today. That compares with 135 for Russia, 82 for Poland and 156 for South Africa. Rising prices show worsening perceptions of a borrower’s creditworthiness, and declining prices the reverse. The contracts pay the buyer face value in exchange for the underlying securities or cash if a borrower fails to adhere to its debt agreements.

The extra yield investors demand to hold Turkish debt denominated in dollars rather than U.S. Treasuries fell two basis points, or 0.02 percentage point, to 178, according to JPMorgan Chase & Co.’s EMBI Global Index. The premium compares with the emerging-market average at 265.

The lira’s gain this month has come after the central bank’s real effective exchange rate fell to 118.3 in December from 119.4 in November.

“The real effective exchange rate has approached the central bank’s threshold of 120,” Emre Tekmen and Selim Cakir, Istanbul-based analysts at BNP Paribas SA, said by e-mail yesterday. “Strong risk appetite” may lead to renewed appreciation pressure on the lira, prompting the central bank to cut its overnight borrowing rate, they said.

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

To contact the editor responsible for this story: Alaa Shahine at

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