In 2012, Turkey experienced export growth combined with a stagnation in internal demand, which helped the current account deficit to decline to 6.4% of GDP, from 10.0% in 2011. The monetary policy easing delivered in mid-2012 reignited bank lending and internal demand growth, putting an end to the rebalancing story. We expect the current account deficit, on the T12M basis, to reverse in February 2013.
In our view, Turkey is entering a risk zone: in the next six months, the current account deficit is set to exceed USD 30bn, while it is not clear that inflows can be sustained at current levels, assuming high valuations on the equity and bond markets. We believe that at some point, the CBRT will have to tighten monetary conditions significantly.
We expect the economy to add 3.5% in 2013, headline CPI to end the year at 6.5% and the current account deficit to reach 6.5%. Turkey’s economy, inflation and monetary policy cycles are 3-4 quarters ahead of Russia’s. Monetary policy in Turkey has just turned to tightening; in Russia, we expect the first easing step in March-April.
At the moment, we see more value in Russia’s local bonds and TRY IRS vs. Turkey’s local bonds. We recommend being underweight Turkish Eurobonds as well as selling 12M TRYRUB NDF.