Turkish lira hits record low on political fears

15/04/2015 00:54 AST

The Turkish lira plumbed another record low against the dollar yesterday, as investors punished the currency on fears of rising political instability ahead of a June 7 parliamentary election.

While the resurgent dollar has hit emerging market currencies across the board, the lira has stood out for its underperformance, hurt by worries about both political meddling in monetary policy and the make-up of Ankara’s economic team after the election.

The possibility of a coalition government after the elections is also seen as a negative.

“Turkey’s risk premium is on the rise,” said Isik Okte, investment strategist at TEB Invest.

“We are concerned about the degree of this negative divergence in the lira and suspect that it is not only the make-up of the economics team post-general elections or the worsening growth dynamics at play here.”

The lira touched a low of 2.6873 to the dollar before edging back to 2.6770, down from 2.6542 late on Monday.

The lira has lost 12% to the dollar this year, the worst performer among all major emerging market currencies apart from Brazil’s real.

As markets weakened, the Turkish Central Bank said it would consider measures to support stability in financial markets at its monetary policy committee on April 22, putting a “measured cut” in forex depo lending rates on its agenda.

The statement had little market impact.

Prime Minister Ahmet Davutoglu has indicated that well-respected economy chief, Deputy Prime Minister Ali Babacan, would not be a minister after the June election - potentially bad news for an economy expected to grow 3% this year, below the government’s target.

President Tayyip Erdogan has also bruised sentiment by fulminating against high interest rates, comments which have raised concern about the independence of the central bank.

TEB Invest’s Okte said some opinion polls suggest the ruling AK Party may not win enough seats to form a single-party government.

“In Turkey’s recent democratic history, coalition governments, 99.9% of the time, have been viewed by market participants as negative because of their overall incompetence in managing the economy,” he said.

Shares also fell, with the main Istanbul index dropping 0.95% to 81,157 points. The blue-chip BIST 30 index has fallen 7% this year.

In dollar terms it is down 18.9%, according to Thomson Reuters data, making it the worst performer among 30 emerging market share indices this year.

The benchmark 2-year government bond yield rose to 9.08% from 8.89% at the spot close on Monday and compared with around 8% at the start of the year.

Reuters