Tags: turkish | lira

Time to Look to the Turkish Lira

By    |   Monday, 24 November 2008 02:03 PM

Back when financial markets were doing good and things were stable, the Turkish lira was the king of the hill.

The currency usually has an interest rate of 16 percent to 18 percent, and this high level of interest draws many investors who are seeking high yields.

To put this in perspective, let’s look at some of the higher yielding major currencies. Even the Australian and New Zealand dollars rarely get above 6 percent to 8 percent interest.

It’s no surprise that, when times are good and foreign currencies are stable or headed upward, that investors want the higher yield and go after the lira. Also, if you think about it, the lira earns five times the interest of the euro currency.

However, the lira has gotten crushed over the last couple of months. Turkey’s debt was downgraded by Standard & Poor's on Nov. 13 on concerns that the country’s banks will struggle to meet their financing needs next year because of the global credit crisis.

This caused the lira to plummet a full 21 percent against the dollar just since the start of October.

If developed nations are having problems with the credit crunch, then investors ask why wouldn’t emerging, undeveloped countries have it even tougher? They have, and that’s why investors correctly ran for the exit doors.

Of course, this has pushed the Turkish Consumer Confidence numbers to an all-time low. Turkey’s unemployment has risen to 9.8 percent in the last few months too. Needless to say, times have been tough for this country and thus, its currency lately.

Turkey has some serious issues to deal with, for sure. For instance, it has about $100 billion of external debt coming due over the next 12 months, but it only has about $70.5 billion in central bank reserves as of Nov. 7.

So, there’s an obvious need for a huge loan in the interim to help to bridge this gap. It looks like the IMF (International Monetary Fund) will come to Turkey's rescue as it has several times in the past and has already done for other emerging economies this year.

Something has to be done fast. The global credit crisis has restricted inflows into the country that Turkey has relied on to finance its economic growth. Foreign direct investment in the first nine months of the year was $12.3 billion, which is 28 percent less than in the same period of 2007.

Turkey, like many emerging economies, is not a stranger to IMF loans. Since 1961, it has had 19 IMF loans, and it's been able to fully pay back two of those loans. This may sound bad, but remember that no other emerging country has been able to pay back even one IMF loan fully.

Why would I suggest buying such a beaten up currency at this point?

For two reasons: The first one is a minor point, but the chartists out there will appreciate it. It appears to be forming a double-top formation on the USD/TRY chart. This means that if the topping pattern holds, then the worst of the outflows are over and the tide is turning for the currency. The collapse of the currency has been so fast and severe that it will likely hold.

However, the second reason is more important since it has to do with the actual reason why the chart may be double topping. The IMF will likely give Turkey a loan up to $40 billion very shortly. The IMF is in talks with the Turkish government in Washington right now.

Turkey just recently lowered its interest rates from 16.75 percent to 16.25 percent. Since lowered rates are an IMF prerequisite for emerging economies to get their loan this year, I look at Turkey's initiative as an indication that the country is fully cooperating with the IMF. That will only speed up the loan process.

I’m confident that Turkey will get the needed funds from the IMF. The agency has already helped three countries so far this year (Iceland, Hungary, and Ukraine) and these countries usually have a harder time paying back money than Turkey does.

As soon as the IMF and Turkey work out Turkey’s budgetary disagreement, the country will get the loan. This will happen very shortly.

The currency market, I believe, is preemptively pricing in the expectations that Turkey will get the IMF loan. That's why we're seeing the double-topping pattern on the charts.

Since these negotiations were started back in May, I’m confident that they will be wrapping it all up shortly. The severity of the credit crisis means that everyone, including the IMF, must work in a timely fashion to turn things around.

This is why I believe the lira is ripe for a turn around. I believe you will see the USD/TRY pair head downward overall during the next three to 12 months as it takes out new yearly lows due to the lira's strength against the dollar.

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Back when financial markets were doing good and things were stable, the Turkish lira was the king of the hill. The currency usually has an interest rate of 16 percent to 18 percent, and this high level of interest draws many investors who are seeking high yields. To put...
Monday, 24 November 2008 02:03 PM
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