Pressure on Turkey

Along with other emerging market currencies, the Turkish lira is under pressure. In addition to broader risk aversion, Turkey-specific developments are also undermining the lira.

At the end of last week Turkey reported that CPI rose to 10.1% in February form 8.2% in January. This coupled with evidence that an economic recovery is gaining traction, has renewed ideas that the central bank to hike rates before too long, even if not at the next meeting on March 18th. The base rate stands at 6.5%.

This provided a poor environment to sell 4-year bonds today. And the reception was lukewarm. The yield was about 10.8%.

There still is great uncertainty about the tax regime for foreign investors. In 2006 the government scrapped a foreign investor withholding tax in order to calm the markets as the lira fell dramatically. Last year the Constitutional Court ruled in favor of tax equilibrium for foreign and domestic investors.

The two solutions proposed: 1) foreign investors pay a 10% withholding tax on stocks, bonds and mutual funds like foreign investors; and 2) all investors subject to a 5% tax. A government panel was reportedly scheduled to meet today but the meeting was postponed.

Turkish bond yields are the highest for the year today with the benchmark 2-year yield up 20bp to 9.5%. The US dollar is up a little more than 0.5% against the lira today. After testing support near the 20-day moving average yesterday, the greenback has bounced back smartly. Resistance now is need near TRY1.55.