Turkish lira to gain but underperforms emerging peers

Turkey's lira, which has underperformed other emerging currencies this year, will appreciate only gradually over the next year, according to a Reuters poll of analysts, held back by a gaping current account deficit.
The lira has fallen 8 percent since the start of 2011 largely because the central bank has held its key policy rate at a record low of 6.25 percent, despite surging growth, in a battle to stop inflows of hot money searching for yield.
The latest survey of 27 analysts showed the lira strengthening slightly to 1.64 to the dollar in three months, 1.61 in six months and 1.60 in a year's time. The lira closed at 1.6690 on the interbank market on Thursday.
"When you listen to what Ankara says, implicitly it looks as if a weaker lira has become the official policy," said Ozgur Altug, chief economist at BGC Partners in Istanbul.
"The central bank has clearly indicated they are not worried about lira weakness, and Economy Minister Zafer Caglayan said a lira stronger than 1.60 hurts Turkey's competitiveness."
A little over a year ago, the Reuters consensus was for the lira to trade at 1.50 around now, an indication of the extent to which the central bank took markets by surprise when it switched to an unorthodox new policy last December.
That unusual approach relies on low interest rates to deter portfolio inflows and higher required reserve ratios (RRRs) for banks in order to slow credit growth by draining liquidity and making loans more expensive.
On Thursday, the central bank left all its key rates on hold, as expected in a Reuters poll of 21 economists. But analysts said the central bank appeared to have departed from its former "tightening" stance. Its more dovish tone coincides with increasing worries about global growth. A worsening euro zone debt crisis and worries about a possible US sovereign debt default in just over a week has also hurt the Turkish lira.
Indeed, the central bank said on Thursday that it might even loosen policy if these crises worsened.
At home, analysts also have become increasingly concerned that Turkey's massive current account deficit could destabilise the economy. The IMF estimates the deficit could hit 10.5 percent of gross domestic product (GDP) this year, up sharply from 6.7 percent last year. Turkey relies on billions of dollars of foreign funds to finance that deficit.
The lira's 8 percent fall against the dollar this year is in sharp contrast with a more than 9 percent rise in the Russian rouble , a 6 percent spike in Brazil's real . It is also steeper than the 4 percent drop in the rand .
In comparison with the lira, which is expected to appreciate 4 percent over the next year, the Brazilian real is seen falling 5 percent and the Russian rouble is seen down almost 2 percent, in a separate Reuters survey.