Awhile back we mentioned that one key indicator to watch in Turkey going forward was its current account deficit (CAD)/GDP ratio, which as the FT noted today in regards to Turkey’s suddenly diverging 5yr-CDS spread with Russia (with whom it had been treading in parity) is largely a function of its reliance on imported energy despite the obvious proximity advantages which shave roughly US$2-4/bbl off the spot rate.  Primarily, Turkey’s CAD should be monitored if for no other reason than the fragility of its foundation: analysts noted last December that “FDI coverage of CAD is less than 14% (12 months rolling), while portfolio flows into local bonds and equity together with rising non-resident lira (TRY) deposits make up over 70%.”  With this in mind the current spike in oil prices is particularly troublesome for Turkey’s economy, especially when coupled with the central bank’s (CBT) apparent curve lagging in the face of inflationary signs (i.e. high production rates and rising capacity utilization levels) that were ignored late last year in favor of rate cuts (75bps in December and January to cool inflows) and reserve requirement hikes to temper loan growth against the backdrop of implied political pressure (to combat currency appreciation) in the face of general elections in June to appease exporters.  Recent data only adds to the fear that the CBT’s rush to normalization cannot be abrupt enough: while February’s headline numbers sit at 4.16% y/y (from 4.90% y/y in January and versus a 5.5% target), the central bank’s preffered I-measure gauge (which excludes all food, energy, alcohol & tobacco and gold) rose to 3.8% y/y from 3.2% previously.  Moreover, per an Absa Capital note from today, not only are the “favourable statistical base effects that have kept the y/y rate of CPI growth low likely to run their course by May this year,” but “the sustained lira weakness (down 11% since November), combined with the surge in oil prices, is likely to start to pass through to inflation,” especially when taken in tandem with unrelenting credit growth: consumer loans rose 3.4% m/m at the end of December (38% y/y), and data as of mid-February saw a 2.6% m/m rise (39% y/y, versus 20-25% targeted).  For investors, however, Turkey’s woes bring opportunity: while Turkey’s benchmark two-year bonds sit at 9.12 per cent (as of Monday), some analysts remain skeptical whether or not local markets are adequately pricing in rate hikes over the coming twelve months.  On the opposite end of the spectrum, Credit Suisse wrote that it believed “a lot of bad news is now priced in as Turkey [now] trades on a 41% discount on our price-to-book versus ROE valuation model, replac[ing] Russia as the most undervalued market within [emerging markets].”

Advertisements