Turkish Lira hurt by IMF deal delay signals

Bloomberg

refid:11164258 ilişkili resim dosyası

The Turkish Lira had the sharpest weekly loss in almost five months and bonds declined on signs a loan accord with the International Monetary Fund faces delay.

The lira touched a record low of 1.7950 against the dollar before rebounding and ending the day at 1.7902 in Istanbul Friday. The dollar rose 4.1 percent against Turkish lira since March 4. The slide in bonds pushed the average yield 12 basis points higher to 15.35 percent, according to an index of securities tracked by ABN Amro Holding NV.

Prime Minister Recep Tayyip Erdoğan said March 2 Turkey doesn’t need loans from the IMF and may not conclude talks on a possible economic agreement until after local elections on March 29. The country, which is seeking to avert a recession, has external financing needs of about $30 billion this year, the central bank estimates. The IMF has provided almost $45 billion of emergency loans to eastern European countries including Hungary, Ukraine, Latvia, Belarus and Serbia.

"The increase in fiscal spending and the absence of a rapid IMF deal will continue to keep the lira weak," London-based strategists including Murat Toprak at Societe Generale wrote in a research note. "We have been recommending a long dollar-lira position for a while, arguing the lira’s outperformance was abnormal given the magnitude of global market deterioration and Turkey’s huge financing needs."

While Societe Generale targets the lira at 1.85 against the dollar, a move to a psychological level of 2 is possible, according to the note.

More volatility

"The lira has been more resilient than other currencies for a longer time and now it’s catching up," said Yarkın Cebeci, an economist in Istanbul at JPMorgan Chase & Co. "We may see more volatility in the nearest days. Fundamentally, nothing has changed, but we’ve got persisting uncertainty about the IMF program and an economic slowdown."

Turkey and the IMF broke off talks on a new program in January and have not said when they will resume. They are divided over issues including "medium-term structural fiscal reform," the IMF said Jan. 26, without being more specific.

Turkey’s budget deficit is widening as the government spends more on highways and hospitals. The shortfall widened to 3 billion liras ($1.8 billion) in January, six times more than a year earlier and equivalent to 29 percent of the government’s full-year goal.

Turkey’s economy grew 0.5 percent in the third quarter, the slowest pace in six years. Industrial output slumped 17.6 percent in December, the most since records began in 1986, after dropping 13.3 percent in November.

To cushion the slowdown, the Central Bank has cut the benchmark interest rate by 5.25 percentage points in the last four months to 11.5 percent, diminishing the attractiveness of lira-denominated assets.

"From now on we are in uncharted territory, and if markets abroad continue to weaken we may expect very sharp declines in the lira," said Levent Güven, head of currency trading in Istanbul at Turkish Economy Bank, or TEB.

The relative strength of the lira in the past weeks may be linked to a tax amnesty that expired March 2, according to Deutsche Bank. About 12.6 billion liras in assets are being repatriated to Turkey under the amnesty.

’Lira to drop, debt costs rise’

The Turkish Lira will weaken further and the nation’s borrowing costs will increase if the government fails to agree to an IMF loan accord this month, Credit Agricole Cheuvreux said. The lira will fall 6 percent to at least 1.90 per dollar if Prime Minister Recep Tayyip Erdoğan doesn’t secure at least a $25 billion loan before local elections, Simon Quijano-Evans of Cheuvreux, said Friday. Turkish Deputy Prime Minister Nazım Ekren will hold talks with IMF chief Dominique Strauss-Kahn in Washington this week.