Turkish inflation fears

ISTANBUL (Reuters) – Turkish inflation figures in May could prompt a fresh sell-off of Turkish assets if they point to a growth-denting rise in borrowing costs, but overall emerging market sentiment will dictate market moves. The lira has lost about 14 percent of its value against the dollar since the end of April, hit by expectations of higher US inflation and interest rates, overall emerging market worries and economic and political concerns at home. A weaker lira will fuel inflation, and inflation in turn could weaken the lira as it erodes its purchasing power. It could also crush bond prices as investors demand higher returns for the risk of lending in lira. May inflation numbers are due on Friday and a Reuters poll points to month-on-month inflation of 0.83 percent. Worse-than-expected inflation data for April were one of the triggers of capital flight from Turkey earlier this month and economists say it would take little to tip the market again. «The market’s in a negative mind frame,» said Tim Ash, economist at Bear Stearns, referring to global anxiety over inflation and concerns over Turkish domestic politics. Investors are worried elections could be called early, which they suspect would loosen fiscal discipline, despite repeated assertions from the government they will serve a full term. «I don’t think it’ll take much… to push the market down again,» Ash said. Inflation concerns Benchmark bond yields set a fresh high for 2006 of 16.66 percent yesterday, which bankers attributed to inflation concerns. That compares with a central bank overnight borrowing rate of 13.25 percent. The central bank said last week fuel and gold prices would add 0.4 percentage points to May inflation. However, Tolga Ediz at Lehman Brothers said overall emerging market sentiment would dictate how markets respond to the data. «If market sentiment stays as it is I think (a worse than expected figure) would cause a minor sell-off… It has to be 1.5 percent or above for this to prompt a big sell-off,» he said, adding that worsening sentiment would make the market more sensitive. Investors also say they will have to wait for June inflation, due at the start of July, to see the full impact of the lira’s weakness on prices. «The lira’s rise might not be reflected still in May data but it will be in June. That number will be important. Because of this kind of risk, we don’t expect to see a positive market,» head of research at Ekspres Investment, Sinan Goksen, said. Impact on growth seen The central bank is targeting inflation of 5 percent this year, although it can stray 2 percentage points either side of that. It kept rates on hold last week but said it would act if inflation diverged substantially from targets. Economists expect rates to go up if lira weakness persists, which would stifle consumer lending, consumer confidence and investment spending. «If this is a permanent correction, this is going to turn into slower growth and higher unemployment,» Ahmet Akarli, economist at Goldman Sachs, said. Istanbul’s main stock index, which stood at Monday’s close 2 percent weaker than it ended last year, and 19 percent off its 2006 peak, is also vulnerable to inflation. Investors have knocked 11 percent off the total market capitalization of the stock market, to 218 billion lira as of Friday, from 244 billion at the end of April, bourse data show. Banks will see losses in the value of their bond portfolios while companies with debt in foreign currency will also feel the pinch, analysts said.