Goldman warns on lira as external balance is flashing red

ISTANBUL: 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.

So far this year a high nominal yield has helped the lira weather the turbulence sweeping across currency markets: it has budged 0.5% against the US 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% 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 US dollar.

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