Turkey set to raise rates, balancing lira and growth concerns

The Turkish Central Bank is worried about economic slowdown. (Reuters)
Updated 12 September 2018
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Turkey set to raise rates, balancing lira and growth concerns

  • The lira has slumped 40 percent against the dollar this year, weakened partly by unease over President Recep Tayyip Erdogan’s influence on monetary policy
  • The central bank confounded expectations for a rate increase at its July meeting, fueling the belief it is under pressure from Erdogan

ISTANBUL: The Turkish Central Bank is expected to raise interest rates on Thursday to calm a currency crisis, but forecasts for the scale of the increase vary widely as the bank balances concerns over lira weakness with worries about an economic slowdown.
The lira has slumped 40 percent against the dollar this year, weakened by unease over President Recep Tayyip Erdogan’s influence on monetary policy and more recently a bitter row with the US that has unsettled investors.
The central bank confounded expectations for a rate increase at its July meeting, fueling the belief it is under pressure from Erdogan, who has called interest rates the “mother and father of all evil” and frequently urges they be kept low.
But after inflation surged in August to its highest in nearly 15 years, the central bank said that it would take action against “significant risks” to price stability — a rare move to soothe financial markets.
It said its monetary stance will be adjusted at Thursday’s policy committee meeting. Analysts saw this as pointing to an increase in the benchmark one-week repo rate, now 17.75 percent — less than the annual inflation rate of 17.9 percent.
Phoenix Kalen, strategist at Societe Generale, forecast the repo rate would be raised to 20.75 percent and would be restored as the main policy instrument after a period during which the effective funding rate has been 19.25 percent.
“Although this amount of monetary tightening may disappoint market expectations and spark renewed TRY weakness, the decision would reflect the prioritization of Turkish authorities’ concerns regarding a rapidly decelerating economy,” Kalen said.
Turkey’s economic growth slowed to 5.2 percent in the second quarter, data showed this week, and the economy is expected to slow again in the second half.
In a Reuters poll, all 11 economists predicted the benchmark one-week repo rate would be raised.
The average forecast was to 22 percent, but predictions ranged from an increase of 225 basis points to 725 basis points.


Dubai property developers put bond plans on hold

Updated 45 min 9 sec ago
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Dubai property developers put bond plans on hold

  • Dubai property prices have fallen since a mid-2014 peak, hurt by a period of weak oil prices and muted sales
  • Residential prices fell 6 to 10 percent in 2018 and are expected to drop 5 to 10 percent more this year

DUBAI: Dubai’s Emaar Properties and state-owned developer Nakheel have put on hold plans to issue US dollar-denominated bonds, Emaar and sources familiar with the bond issues said, amid a real estate downturn and volatility in emerging markets.
Emaar told Reuters that it had put on hold a planned bond issue, blaming rising interest rates but did not elaborate. Nakheel declined to comment.
Three financial sources said the firms had planned dollar-denominated sukuk, or Islamic bonds, and would have had to pay a yield premium to attract enough investors due to concerns about Dubai’s property price slide and emerging market volatility.
Dubai property prices have fallen since a mid-2014 peak, hurt by a period of weak oil prices and muted sales, although the slide has not come close to the more than 50 percent plunge seen in 2009-2010, which pushed Dubai close to a debt default.
Residential prices fell 6 to 10 percent in 2018 and are expected to drop 5 to 10 percent more this year, according to Savills. The drop has hurt developer earnings.
Emaar, developer of Burj Khalifa, the world’s tallest building, reported a 29 percent fall in the third quarter last year, while Dubai’s second-largest listed developer DAMAC reported a 68 percent drop.
The financial sources said Emaar and Nakheel hired banks a few months ago to issue Islamic bonds but shelved the plans.
An Emaar spokesperson said its decision to put its plan on hold was not linked to the property market performance.
“The bond was considered more than a year ago and was put on hold due to increasing interest rates. The decision was not based on market conditions,” the spokesperson said.
Dubai government owns a minority stake in Emaar.
Nakheel, developer of palm shaped islands off Dubai, was one of the worst hit by Dubai’s 2009-2010 real estate crash, forcing it into a massive debt restructuring. It has not issued public debt since it nearly defaulted in 2009.
The market downturn has put pressure on property companies’ existing bonds, which investors use as a parameter to establish the price of new debt sales from borrowers in the same sector.
In secondary debt markets, yields of bonds issued by Dubai developers have risen significantly over the past few months, underperforming corporate debt from other sectors.
DAMAC’s $500 million sukuk due in 2022 and $400 million Islamic paper due in 2023 saw their yields spike by over 200 bps and 150 bps, respectively, since early November.
BofA Merrill Lynch last week forecasted weaker booked sales and gross margin for DAMAC, saying it was likely to be pressured by the property market and upcoming debt and land payments.
DAMAC did not immediately respond to a request for comment.
Yields on a $600 million sukuk issued by private developer Meraas, due in 2022, have jumped by around 120 basis points in the same period. Meraas declined to comment on the move.