Turkey
Pimco: how to stop the Turkish asset rout
Fast FT
YESTERDAYby: Mehreen Khan
It’s politics, stupid.
Turkey’s 2017 asset rout has driven the lira to record lows and sent the country’s
local currency borrowing costs soaring in a torrid start to the year for an
economy once seen as an emerging markets darling.
The lira’s sell-off has accelerated this week on the back of fears over another
junking for Turkey’s sovereign credit rating status later this month and a
worsening in the country’s political environment with the arrest of major
business figures and suspected government opponents.
According to investors at bond fund Pimco, there’s only one thing that can stop
“Unless decisive action is taken, any rally in prices will be seen by the market
and locals as an opportunity to buy more dollars, and the negative cycle could
continue”, Francesc Balcells, an EM portfolio manager.
With the lira plunging more than 11 per cent against the dollar so far this year
and suffering its biggest daily hit
(https://www.ft.com/content/a6f1058d-9f30-331c-8de5-8dd294ea4697) since a failed July coup on Tuesday, a repeat round
of Turkey’s 2014 emergency rate hikes looks to be on the cards.
At 8 per cent, the country’s key interest rate also has a long way to go before
hitting the near 12 per cent level seen two years ago.
The lira was given a slight reprieve yesterday after the country’s president – a
longstanding critic of high interest rates – said the central bank should move to
“thwart” speculators by tightening policy
(https://www.ft.com/content/a3c27a46-dab9-340a-bbe7-f4b1643f02e4).
“The central bank has the necessary tools and ability to take measures on this”,
Recep Tayyip Erdogan said in a television address on Thursday, helping the lira
Turkey’s economy is particularly vulnerable to a plunging currency and any
sudden loss of investor confidence due to a reliance on foreign cash to finance
its growing current account deficit.
“While Turkey has traditionally been able to raise this kind of financing the
reality is this can no longer be taken as a given”, said Mr Balcells.
The cost of servicing dollar-denominated debt also rises as the lira falls. With
the greenback climbing to more than decade-highs, a global economic
environment with faster Federal Reserve rate hikes could also hamper the
Turkish central bank’s efforts to protect the currency, add Pimco:
The stronger greenback, a slowing economy and persistent concerns about the
independence of Turkey’s democratic institutions have led fixed income analysts
at HSBC stay bearish on the country.
Bond investors are betting on it, judging by the flattening of the Turkish
yield curve.
The road ahead may be considerably different from the past, in part due to
the potential for new policies and the rate-hiking cycle in the U.S.
“Turkey is one of the countries most vulnerable to dollar strength, and the
depreciation in its own currency has already seen non-financial corporates’ debt
to equity ratios increase to more than 200 per cent”, said Radoslaw Bodys at
HSBC.
Investor attention will now turn to the central bank’s latest monthly meeting
due on January 24 and a rating decision from Fitch three days later.
A junking would see Fitch join Moody’s and S&P in downgrading the country
and imposing higher funding costs on domestic banks.
Read more
• Battered: Turkish lira suffers worst year since 2008
(https://www.ft.com/content/d402280c-1f1f-340b-8fa6-92e208211d92?
cid=38815108&[email protected]&etaid=10128982)
• Lira imperils Erdogan’s grand designs in Turkey
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