(Repeats Friday item without changes)
* Fresh funds, cooling domestic credit seen good policy mix
* Foreign investors eyeing July 27 inflation report
* Central bank raised rates 250 points to 17.5% on Thursday
LONDON, July 21 (Reuters) – Turkey has under-delivered
on rate hikes for a second month, but foreign investors are as
yet unfazed and expect fresh money flows, cooling domestic
credit and rising currency reserves to provide some breathing
space to the battered emerging market.
Policymakers hiked interest rates by 250 basis points to
17.5% in their second meeting under new Governor Hafize Gaye
Erkan on Thursday, continuing to reverse the low-rates policy
that had been favoured by President Tayyip Erdogan and promising
more tightening and additional measures.
While that leaves the benchmark well short of inflation,
which is running at almost 40%, the direction of travel is the
right one, fund managers and analysts said.
“The country should avoid large balance of payments
challenges for now,” said Nick Eisinger, fund manager for
emerging markets fixed income at Vanguard.
“It is hard to establish when pressure will arise again, but
it might not be for a while.”
The country’s international bond prices clung to multi-month
highs, with shorter-dated bonds trading just below par.
Investors were betting the government would try to avert a
recession ahead of local elections in March, and were
reassessing the timing of much needed further rate hikes, said
Liam Peach, senior emerging markets economist at Capital
Economics.
“There is a huge gap between rates and inflation, but
investors still have faith in this policy shift,” Peach said.
“They will tolerate a gradual tightening cycle if the key rate
rises towards 30% at the end of the year.”
International bonds are still widely held by foreign
investors, though much less so the domestic ones exposed to the
lira currency’s wild swings.
However, that might also be changing said Paul McNamara, a
London-based investment director at GAM Investments, pointing to
the lower trajectory of domestic credit growth – a potential
signal that Turkey might be moving away from red-hot growth that
had fuelled recent boom-and-bust cycles.
“As long as credit growth keeps heading down, we are
becoming more positive on Turkey,” he said. “We haven’t put
money to work yet, but I’d say we’re an awful lot closer to it.”
The central bank on Thursday introduced a 15% minimum
reserve requirement for FX-protected lira deposits in a move
that bankers estimated would suck 450-500 billion Turkish lira
of liquidity from the market.
BETTER BUFFERS
Rising central bank reserves are another positive sign.
Net international reserves rose to $13.25 billion in the
week to July 14, continuing a rebound from record lows after the
bank stopped using them to support the lira.
The currency has lost more than 30% so far this year and hit
a record low of 27 to the dollar this week..
Investors are focused on Thursday’s central bank’s inflation
report, the first under Erkan and the first time she will hold a
news conference since her appointment.
“I would strongly expect a clear roadmap, especially
when there are increased pressures of further inflation,” said
Emre Akcakmak, a senior consultant at emerging markets fund
manager East Capital.
JPMorgan raised its inflation outlook for Turkey after the
rate hike, now expecting year-end inflation at 57% versus 50%
previously.
Meanwhile, new money flows provide much needed relief.
Summer tourism will boost hard-currency revenues though
investors want to see more details on new loans from the Gulf,
after the United Arab Emirates and Turkey inked several deals
estimated to be worth $50.7 billion.
“It’s still not clear in what shape and timing the country
will get the flows, but it will definitely help,” said Cagri
Kutman, senior fixed income sales at KNG Securities. “That is
why people are still giving (the government) the benefit of the
doubt.”
(Reporting by Jorgelina do Rosario, editing by Karin Strohecker
and John Stonestreet)
Read More: ANALYSIS -Investors look beyond Turkey rate hike disappointment, for now – Today