Jun 13 2018

Turkish lira slumps on renewed concern over economic policy

Turkey’s lira slumped against the dollar in the biggest loss among emerging market currencies amid renewed concern over the government’s economic policies.

The lira slid 1.7 percent to 4.675 per dollar at 12:07 p.m. in Istanbul, giving away all the gains it made earlier this month from a latest 125 basis-point rate hike by the central bank. The country’s benchmark 10-year lira debt weakened, with yields climbing 27 basis points to 15.45 percent.

Cemil Ertem, senior economic adviser to President Recep Tayyip Erdoğan, said on Wednesday that there was no correlation between the government’s target of faster economic growth and Turkey’s double-digit inflation rate, confounding criticism that its policies have led to economic overheating.

“This kind of stuff just does not help market sentiment,” said Tim Ash, senior emerging markets strategist at Blue Bay Asset Management in London. “Actually we have a crisis of confidence in Turkey, post Erdoğan’s London trip. Might end up needing an IMF programme post election, to shore up confidence.”

Investors in Turkey are fretting over economic policy, fearing that Erdoğan may reverse 425 basis points of rate hikes made over the past month to steady the lira. The Turkish president told investors in London in May that he planned to take more control over monetary policy following the election and would reduce interest rates. With Erdoğan remaining silent on the issue since, attempts by Turkish ministers to limit the fallout of his comments on the lira and other Turkish assets have had only limited success.

The lira slumped to a record low of 4.92 per dollar in May, forcing the central bank to raise interest rates by 300 basis points to avert a looming currency crisis.

Economic data since has done little to calm investor nerves over the economy. The current account deficit has widened to 6.5 percent of GDP, while economic growth accelerated to 7.4 percent in the first quarter, figures published by the Turkish authorities showed this week. Erdoğan said on Monday that the government planned to keep the economy growing quickly.

Elections in Turkey, set for June 24, are also causing uncertainty among investors. Turkish polls are showing that the presidential and parliamentary votes are too close to call.

Erdoğan may win the presidential election in the first round, precluding a run-off on July 8, while his party and a nationalist ally could lose control of parliament, a survey by Foresight Danismanlik and commissioned by Bloomberg showed on Wednesday.