Turkish central bank’s rate silence risks letting foreign investors escape

LONDON - Reuters

Foreign investors sitting on losses of 5-15 percent in Turkey are likely to cut and run without a swift and substantial interest rate rise to stabilise the plunging lira.

Foreign fund managers have yanked around $3 billion from Turkish stocks and bonds since the last week of May, central bank data shows, reversing only a tiny part of the investment inflows the country has received in recent years. But the lira’s 9 percent plunge against the dollar since early May has had a huge effect on the value of their holdings, which are now worth just over $120 billion - $30 billion less than a record high set at the start of May.

The lira rout has come on top of a 400 basis point spike in bond yields and a 20 percent fall in Istanbul stocks. Equity returns are currently at minus 16 percent for 2013 while bonds have lost 5 percent. But a JPMorgan investor survey at the end of June showed foreign funds held only a small underweight on local bonds and retained a small overweight on the currency.

“Turkey is in a very dangerous situation. We haven’t really seen massive outflows yet but they could become very acute,” said Luis Costa, head of CEEMEA currency and debt at Citi.

Turkey’s balance of payments deficit and reliance on foreign short-term capital is widely viewed as its economic weak spot.Data on July 11 showed the funding deficit had widened almost 20 percent to year-ago levels, making the central bank’s blowing in recent days of $6.3 billion to defend the lira - more than a tenth ofits useable reserves - look all the more risky.

The central bank has been reluctant to hike following a credit-fuelled boom, however, while Prime Minister Tayyip Erdoğan, aware of the negative impact on Turks of higher borrowing costs, has blamed a “high interest rate lobby” for instigating widespread protests against his government.