Thursday 11, October 2018 by Bloomberg

Lira faces headwinds even as Turkey current account recovers

 

Turkey’s balance-of-payments position is on the mend but that may not be enough to shield the lira from a turbulent October.

The country is expected to see its biggest monthly current-account surplus on record in August in data on Thursday, according to the median estimate in a Bloomberg survey. That would be the strongest sign, yet that Turkey’s overheated economy is slowing, after import-driven growth that left the currency at the mercy of an exodus of foreign capital.

Still, with Turkey’s fraught relations with the US hanging in the balance before jailed American pastor Andrew Brunson stands trial on Friday, investors aren’t exactly piling back into the nation’s assets. Inflation is running at a 15-year high, leading some to look for the central bank to raise interest rates again at its next meeting on 25 October.

The current-account data should be “supportive for the lira short-term,” said Oliver Weeks, an economist at Emso Asset Management in London, which manages around $5.5 billion of assets and is carrying a “small” positive position in the Turkish currency. There is “too much uncertainty” regarding Brunson, the central bank, and risks surrounding lenders’ foreign-currency debt rollovers to take a large position, he said.

The lira has held its ground this month at around 6 per dollar, having lost nearly 40 per cent of its value this year. The adjustment in the current account comes amid a slowdown in economic activity triggered by the currency rout.

Lending is falling, the pile of bad debt on bank balance sheets is growing and consumer confidence is at the lowest in a decade. The risk of another shock to sentiment could lead to a sharper contraction, exposing the lira.

“Rebalancing is a positive investment theme, only if it is engineered by policy makers employing prudent policies,” said Inan Demir, an economist at Nomura International Plc. in London. “It simply is not possible to form a positive investment narrative on a rebalancing that is the result of a hard landing.”

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