Investors Look Past Turkey’s Achilles’ Heel

By Emre Peker

ISTANBUL–Turkey’s economic Achilles’ heel, a chronic and once-again widening current-account deficit, is getting more visible with each passing month. But international investors are sanguine, seeking to deploy cash from the global monetary easing and betting Turkey will score a second investment-grade rating amid peace talks to end a three-decade Kurdish insurgency.

The central bank said Thursday that Turkey’s short-term foreign-funding needs rose by 21% on an annual basis to $5.13 billion in February. With that, the current-account gap for the 12-month period widened for a second straight month to $48.4 billion, or 6.2% of gross domestic product.

Despite warnings from economists that Turkey can’t sustain external funding requirements exceeding 5% of its $786 billion economy, markets shrugged off the latest data showing a further deterioration in the current-account gap. The Borsa Istanbul 100 index rose more than 1% to 83362, while the lira gained 0.14% to 1.7863 per dollar. The yield on Turkey’s benchmark two-year bond dropped to 5.75% from 5.82%.

Investor appetite for Turkey is fueled partially by speculation that Moody’s Investors Service Inc. will upgrade the country’s credit rating by one notch to investment grade this year. Fitch Ratings awarded Turkey investment-grade status in November, enabling more international fund managers to buy Turkish assets.

Moody’s boosted expectations on Thursday with a note that touched on Prime Minister Recep Tayyip Erdogan’s efforts to secure a lasting peace with Turkey’s Kurds, who make up about 20% of the country’s 75 million population. A three-decade uprising in the country’s southeast by the Kurdistan Workers’ Party–known as PKK and listed as a terrorist organization by Turkey, the U.S. and the European Union–claimed more than 40,000 lives and cost the economy as much as $450 billion, according to official estimates.

“The prospect of peace promises to boost investor confidence and improve southeastern Turkey’s attractiveness as a destination for foreign direct investment, which would deliver economic benefits and reduce Turkey’s external vulnerabilities, enhancing sovereign creditworthiness,” Moody’s analysts Sarah Carlson and Daniel Marty in London said in a report Thursday.

Moody’s comments echoed a similar note by Standard & Poor’s Corp. in late March. S&P analysts increased Turkey’s credit rating by one step to BB-plus, citing the country’s economic rebalancing and the peace talks since October that culminated in a cease-fire last month.

Yet the upbeat reports contrast with the rating firms’ earlier stance, when they listed foreign-funding needs as a major obstacle in Ankara’s aspirations for investment-grade status. When the current-account gap hit a record $78.4 billion, or 10% of GDP, in October 2011, investors sold off Turkish assets, causing the lira to 20% drop against the dollar and triggering double-digit inflation.

Now, steps such as the Bank of Japan’s decision to pump more money into the economy and record-low yields across the world are pushing investors to Turkey, despite economist forecasts of a widening gap on the back of rapid consumer-lending growth.

In February, Turkey financed 61% of its current-account deficit with so-called hot money as portfolio inflows more than doubled to $3.1 billion compared with the previous month.

Meanwhile Turkey’s inflation climbed to 7.3% in March from 7% in February, and data released last week showed that the economy expanded by only 2.2% last year, missing analyst and government estimates ranging from 2.5% to 3%.

“Not a great combo of data: higher and wider current account deficit, higher inflation and weaker growth,” said Tim Ash, head of emerging-market research at Standard Bank Plc in London. “But markets don’t seem to care much at the moment with emerging markets still awash with liquidity, and Turkey underpinned by hopes on the PKK peace front … and more positive commentary of late from Moody’s.”

via Investors Look Past Turkey’s Achilles’ Heel – Emerging Europe Real Time – WSJ.