Turkey

Bad timing by the Turkish central bank

The Turkish central bank decided at its latest meeting to leave key interest rates on hold at 24.00% – so far, so good. Less good is that the accompanying statement now fails to contain the reference to the possibility of adopting further tightening measures as required. Monetary policy is now said to be aligned in such a way as to keep the inflation rate within the target range. Markets interpreted this as a signal that the tight monetary positioning was to be softened. This had the effect of unsettling the lira which at times fell against the euro and the US dollar to its lowest level since October last year. A closer examination shows the altered positioning of the central bank to be quite comprehensible when viewed against the fundamental backdrop. Price pressure has eased up noticeably in recent months and can be expected to ease further looking ahead. With…

Turkish central bank responds

» Central bank raises reference rate for emergency liquidity by 300 basis points to 16.5%. Lira gains uplift following the announcement. » Political representatives, including President Erdogan and Prime Minister Yildirim, also tried yesterday to counter the sell-off of the lira. » So far, however, the central bank has failed to lastingly stabilise the currency. Further steps may be necessary. The Turkish central bank left itself plenty of time, but yesterday it finally reacted in an emergency meeting to the sharp fall of its national currency in recent weeks. The lira has lost about 15% against Europe’s single currency since the beginning of May alone. Ahead of the meeting, it weakened up against the US dollar by as much as 18%. With its decision to raise the reference rate for emergency liquidity, the de facto key interest rate, by 300 bp to 16.5%, the central bank succeeded in raising the…

Turkey: Current lack of positive perceptions

Among the larger emerging markets, hardly any is as greatly reliant on a benevolent risk perception by markets as Turkey. Faced with a chronic current account deficit and high share of short-term foreign liabilities, the country has to rely strongly on external financing. A distinct lack of currency reserves can also be noted. The alternative to a favourable risk assessment is – so to speak – an increase in refinancing costs. In recent weeks, a number of factors have put a damper on the risk perception of Turkey. This trend was precipitated by strained diplomatic relations over the independence efforts recently voiced by the (Iraqi) Kurds or the dispute between Washington and Ankara after both sides had stopped granting visas. Remarks of the rating agency S&P didn’t help much either. The agency issued a commentary identifying the new „Fragile Five“, i.e. countries likely to be especially vulnerable in conditions of…

Deceptive calm surrounds the Turkish lira: constitutional reform generates new uncertainty

The political situation in Turkey will be the deciding factor as to how the Turkish lira will perform in the weeks and months ahead. Turkey will vote on amendments to the constitution on 16 April. These include concentrating power in the hands of the President and significantly curtailing the powers of the parliament. Even though the ruling AKP party with president-in-office Erdogan has the media on its side, the latest polls show that a ‚yes‘ vote by the people of Turkey is by no means certain. In fact, there seems to be a deep split among the Turkish population. This is also likely to be due to the fact that Erdogan and his faithful supporters have turned the referendum into a key election about Turkey’s future. According to media reports, the police and the judiciary are attempting to suppress citizens pushing for a no vote in the referendum. President Erdogan…

Turkey: Investor confidence undermined by the political

The Turkish currency has weakened up noticeably in recent weeks. Since the end of October in particular, the Lira has been heading in only one direction against both the US dollar and the euro – and that’s downwards, with one historic low being marked after another. This phase of weakness is being driven to some degree by the prospect of the Federal Reserve tightening its monetary reins. But the Federal Reserve cannot be the sole reason for this trend, particularly given the good performance being staged by a number of other emerging market currencies. The political uncertainty, President Erdogan’s radical approach to dealing with opponents and journalists as well as the gloomier economic prospects are far likelier to be behind the loss in investor confidence. The situation is being compounded by Erdogan’s vague threats of „market interventions“ and the speculation being fueled over impending controls on the movement of capital….