Turkish Prime Minister Recep Tayyip Erdogan, confronting a slumping lira and rising bond yields, faces three elections in the next two years with a central bank unwilling to risk financial stability to boost the economy.
Turkey will vote in local and presidential elections next year and at parliamentary elections in 2015. Two-year borrowing costs that are the highest in emerging markets after Brazil and India and a lira that fell to a record low this month are signaling Erdogan may struggle to enlist the economy as an ally for his Justice and Development Party, also known as AKP.
Growth will probably average 3.8 percent through 2015 after a below-target 2.2 percent last year, according to the International Monetary Fund. That threatens to undermine Erdogan’s political prospects as he pushes for Turkey to become one of the world’s 10-biggest economies by 2023. Central bank Governor Erdem Basci has resisted government calls to ease policy as he tries to defend the lira and keep foreign investors attracted to the nation’s assets.
“Around 27 percent to 30 percent of those who voted for AKP in the last elections are supporting the party grudgingly,” Ozer Sencar, head of Ankara-based polling company MetroPOLL Strategic and Social Research, said in a phone interview yesterday. “They may leave at the first opportunity and the likelihood of them voting for opponents in the next local elections is high.”
Basci said two days ago that “a measured step to widen the interest-rate corridor” will be on the agenda at the central bank’s meeting July 23. Economy Minister Zafer Caglayan said the central bank should use all other instruments except interest rates to manage volatility in the economy, Sabah newspaper reported the same day.
“There’s definitely no pressure on the central bank,” Yigit Bulut, Erdogan’s chief adviser, said in an interview in Istanbul on July 15. “Whatever the market requires in the short term, the central bank has the authority to do it.”
Two-year yields dropped to a record low 4.79 percent on May 17 after the central bank cut rates to a record low and Moody’s Investors Service raised Turkey to investment grade a day earlier. Since then, anti-government protests and speculation the U.S. Federal Reserve will scale back $85 billion a month of bond purchases sent yields soaring and the lira tumbling.
The central bank has spent $6.4 billion of its foreign-exchange reserves since June 11 to curb the depreciation of the lira, which slid to a record 1.9740 per dollar on July 8. The yield on two-year notes has jumped 406 basis points in two months, the biggest increase after India among developing nations. The yield reached a 13-month high of 9.59 percent on July 11. The yield fell 10 basis points to 8.85 percent yesterday.
“If governor Basci is referring to a mere 50 basis-point widening in the corridor, we think that this will be insufficient to soothe investor concerns and might even result in a selloff,” Tevfik Aksoy, chief economist for central and eastern Europe, the Middle East and Africa at Morgan Stanley in London, said in an e-mailed note yesterday.
The lira fell 0.2 percent to 1.9243 per dollar at 9:30 a.m. in Istanbul today after gaining for a second day yesterday. Credit Suisse Group AG raised its three-month target for the currency to 1.89 per dollar from 2 per dollar earlier, citing central bank support for the currency.
Erdogan’s AKP came to power in 2002 on a pledge to improve the economy after the currency’s 54 percent depreciation the previous year sent inflation spiraling to 73 percent. The party increased its share of votes in the two parliamentary elections since then, receiving about 50 percent backing in the 2011 ballot.
AKP’s support rebounded to 42 percent this month from a two-year low of 35 percent in June as protests in Istanbul’s Gezi Park, near Taksim Square, subsided and Erdogan said political differences should be dealt with at the ballot box, according to MetroPOLL’s Sencar.
“Support for AKP hit its lowest since the 2011 elections in June due to Gezi among other things,” Sencar said. “That’s what we call AKP’s loyal voter level.”
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