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.

The Turkish central bank is in an unenviable position at the moment. Caught between two stools, it must deal on the one hand with a weak currency while on the other hand placate Erdogan who would prefer to see interest rates lowered. At any rate, last week’s cautious increase in interest rates did no one any favour. On the eve of the decision President Erdogan argued for a more expansionary bias to monetary policy, while investors viewed the step as confirmation of their assessment that the central bank was failing to adopt a sufficiently resolute approach.
Does this mean that the Lira is heading to become a genuinely weak currency? Not necessarily, given the possibilities that exist from the Turkish currency’s perspective of ensuring stabilization. In the short term, there is hope that the current euphoria for the US economy will soon abate and take the pressure off the Lira in the process. But without intervention on the part of the Turkish decision makers, it is likely to prove difficult to restore the Lira to recovery over the long term. Clearly the most sensible thing would be if the heads of state were to do all within their means to win back investor confidence. Alternatively, the focus could shift to the central bank, given the possibilities it has to prop up the country’s currency in the event of further considerable losses by introducing a significantly tighter monetary policy.

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