TL hit April record nine-month appreciation
Economists report the Turkish lira (TL) hit a record low for the last nine months. Foreign currency sales were set off April 11, based on an expected continuation of a downward trend in inflation. Analysts report another factor that triggered foreign currency sales were expectations of further rate cuts by the Central Bank (CB) of Turkey, forcing the U.S. dollar below TL 1.3 million. Economists reveal this is the lowest level with the lira closing at 1,290,204/1,296,427 to the U.S. dollar on the CB brokered spot market in comparison with 1,299,397/1,305,664 on April 10. The April 10 figure was reportedly the highest level since July 5, 2001 - when the lira ended up at 1,273,992/1,280,137 to the U.S. dollar. The Turkish Central Bank's (CB) monthly survey, reveals economists predicted consumer price index (CPI) would rise an average of two percent in April. Analysts report this caused a sell-off in the foreign currency market on April 11 with anticipation of a greater decrease in interest rates. The most recent survey from the Central Bank was reviewed by 70 financial and real sector economists on a monthly basis. Survey results indicate that year-end inflation is forecast to remain at 39.1% compared to a year-end inflation expectation of 43.6% in March and a government projection of 35%. A month-on-month increase of 1.9% was seen on the Wholesale Price Index (WPI) and a 1.2% on the Consumer Price Index (CPI) in March 2002. When inflation figures are compared, March figures brought year-on-year inflation down to 77.5% on the WPI and to 65.1% on the CPI as compared to 91.8% and 73.1% consecutively in February. Analysts say that in JP Morgan's most recent report on Turkey, that the investment house revealed they believe year-end inflation targets will be reached. The CB's most recent survey reveals that growth outlook is looking slim with GNP growth estimate averaging two percent for 2002. That is the same figure shown in the previous survey. For this year – the government is targeting a three percent GNP rate of growth coming up behind last year's 9.4% contraction. Economists and market experts forecast a current account deficit of $4-7 billion for 2002. Rising concern in government about TL The International Monetary Fund (IMF) told the Turkish government and media that excessive valuation of the TL is a problem – adding that economic growth is crucial in order for Turkey to sustain its debts. IMF officials are also wary about the TL's current stability which they report could threaten future competitiveness in the Turkish marketplace. Meanwhile, the Turkish government has sounded off on its concerns about TL strength, with Central Bank Governor, Süreyya Serdengeçti and Banking Regulation and Supervision Agency (BDDK) chief Engin Akckoca expressing their concern about signals that banks were increasing their foreign exchange exposure similar to what happened in 2001, right before the financial crisis. Turkish economists are echoing this concern as they report local banks expanding their foreign currency short positions in order to purchase treasury bills in the expectation of falling interest rates. Analysts add that there could be some sidestepping of rules where this type of action is concerned. BBDK claims no cause for worry Despite these concerns, Turkish banking sector regulator, BDDK, reported monitoring banks very closely domestically and abroad to make certain no irregularities occur. BDDK provided information to analysts, economists and the government that proves, it explained, that private banks' foreign currency short position was $1,487 million on December 28, 2001 and $1,225 million on January 25 implying that lira appreciation did not arise from a foreign currency sell-off by these banks. Turkey's Central Bank is expected to cut its short-term rates as it did three times since February – which should, analysts report, contain the appreciation of the value of TL. Analysts add that the Central Bank might increase the size of its daily foreign currency buying auctions from its current $20 million. Experts further reveal that what they call excessive currency strength could end up being followed by a sharp correction in September, and signal a potentially negative impact on export growth. So far, preliminary data from the Customs Undersecretariat shows that exports for March 2002 rose by 5% y-o-y to $2.7 billion while imports dropped by 14% y-o-y to $2.6 billion in March 2002. IMF: Recovery needs strength and timing Economists are expecting the correction as a result of current account deficits after the tourism season as well as increasing syndicated loan liabilities at local banks. Though, analysts currently report increased confidence and a drop in interest rates on par with inflation, there is still cause for concern. It is true they report that the Treasury can now more easily handle its domestic debt. Meanwhile economists say a delayed growth process could be a threat to debt dynamics. Meanwhile, the IMF is also worried about the same thing. IMF officials have stressed repeatedly that strength and timing are two factors to watch for a recovery in output. They also emphasize that financial markets and investors are braced for possible further shocks. Several other factors to consider, experts reiterate, are prolonged slow growth and a growth boost. If the former were to continue, it is expected to have an adverse impact on Turkey's ability to sustain its debts. In order for the latter to happen, crucial structural reforms to raise private investment, productivity and lower interest rates will have to be firmly in place. Just like the rest of the public, financial experts are taking a wait-and-see approach with a fervent hope that no evidence of an economic reverse is in sight.