Erdogan win helps Turkish markets bear growing c/a gap

By Simon Cameron-Moore

ISTANBUL, June 13 (Reuters) – Turkey’s current account deficit rose sharply year on year in April, the central bank said, but markets buoyed by Sunday’s election result opted for relief that the data provided no nasty surprises.

Following the re-election of Prime Minister Tayyip Erdogan’s AK Party for a third term, credit ratings agency Fitch issued a statement on Monday saying any upgrade of Turkey’s sovereign ratings would depend on political stability and securing sustainable growth consistent with macroeconomic stability.

A key weak point in Turkey’s otherwise positive economic outlook, the deficit rose 77 percent year on year to $7.68 billion, above a Reuters poll forecast for $7.55 billion.

In the first four months of the year it widened to $29.64 billion from $13.86 billion a year ago.

The burgeoning external deficit, credit growth running at 36.5 percent year-on-year, and an acceleration in the inflation rate from record lows struck in March have fuelled fears that the economy is overheating.

Finance Minister Ali Babacan said last week that economic growth could be around 6 percent this year, moderating from 8.9 percent in 2010, but well above an official forecast of 4.5 percent for 2011.

“In addition to political stability, a potential upgrade of Turkey’s sovereign ratings from BB+ to investment grade would depend on securing sustainable growth consistent with macroeconomic stability,” Ed Parker, Fitch’s Head of EMEA Sovereign Ratings, said.

“The latest trajectory of the current account deficit, inflation and bank credit growth means the jury remains out on this,” he said.

The April current account deficit showed a sharp drop from the record $9.766 billion recorded in March, though analysts said there were one-off factors related to foreign direct investment flows, and they did not see the month-on-month fall signalling that a slowdown had started.

“There might be a slowdown in the second half,” said Mehmet Besimoglu, chief economist at Oyak Securities in Istanbul.

“Production is already slowing down, especially automotives.”

Markets responded positively after Prime Minister Tayyip Erdogan’s market-friendly AK party, as expected, secured a third consecutive term in power, providing policy continuity and political stability.

By 1135 GMT, the lira stood at 1.5720 to the dollar, losing some early strength but still firmer than Friday’s close at 1.5770.

The benchmark Feb. 20, 2013 bond yield fell to 8.81 percent from 8.87 percent at the end of Friday trade. The main Istanbul share index rose 0.54 percent to 64,035 points.

This year’s current account deficit is forecast to be a record, way above the $6.7 billion deficit recorded in 2010.

Oyak Securities forecast it would reach $75 billion, equivalent to 9.4 percent of GDP.

The policy focus has been on the mounting external deficits, and interest rates have been kept low to weaken the lira and deter hot money inflows.

But analysts argue that the central bank should change tack and raise interest rates and the government should tighten up fiscally to choke off rising inflationary pressures.

Besimoglu noted comments by ministers that they stood ready to take extra measures if needed to rein in the deficit, but he voiced concern that after the AK Party’s win, Erdogan may move to call a referendum on a new constitution and that might affect the timing of any measures.

“People are talking about extra measures, but then there’s the referendum story. If that starts cooking up it might be a difficult choice for the government, so let’s see what happens,” Besimoglu said.

In his victory speech on Sunday night, Erdogan said he will seek consensus to change Turkey’s military government-inspired constitution, but analysts saw plenty of scope of political turbulence in Turkey. “The anticipated preparation of a new constitution has the potential to create significant political uncertainty, as it may well raise profound and controversial issues related to the division of power, secularism, religion, nationalism and ethnic minority rights,” Fitch’s Parker said.