Goldman Warns on Lira as External Balance Is `Flashing Red’

(Bloomberg) -- Turkey’s lira is beginning to look like a bastion of stability if its performance this year is anything to go by. Goldman Sachs doesn’t expect that to last.

The country’s interest rates remain too low to rein in the economy’s widening current-account deficit and tame inflation, analysts including Mark Ozerov wrote in a note. But with authorities not keen on the weaker growth that would accompany rate hikes, it would take “a degree of market pressure on the currency” for the central bank to move, they said. Moody’s Investors Service also said effective monetary policy was being undermined as it cut Turkey’s credit rating further into junk.

Goldman Warns on Lira as External Balance Is `Flashing Red’

So far this year a high nominal yield has helped the lira weather the turbulence sweeping across currency markets: it has budged 0.5 percent against the dollar. But as runaway inflation eats away at the value of the currency and double-digit economic growth pushes the current-account deficit to around 6 percent of output, that advantage is being eroded and the lira will underperform peers, Goldman argues.

“Turkey continues to show the classic signs of an overheating economy, with double-digit inflation and a worsening external balance,” Ozerov said. The bank’s 12-month lira price target as of December was 3.90 per dollar.

Moody’s on Wednesday lowered Turkey’s rating one notch to Ba2, two levels below investment grade. The government appears focused on short-term measures, undermining policy and economic reform, Moody’s analyst Kristin Lindow wrote in a note. Persistent inflation and political drivers, such as the ongoing state of emergency following an attempted coup in 2016, have weighed on the country, Lindow said.

The lira fell 0.4 percent against the dollar to 3.8179 by 9:25 a.m. in London. The yield on Turkey’s 10-year government notes jumped as much as 12 basis points to 12.32 percent, the highest since Dec. 18.

The central bank left its policy rates unchanged on Wednesday even as data this week showed inflation held above 10 percent in February, more than double the the monetary authority’s target.

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