Turkish Lira Leads Emerging-Market Drop on Erdogan Rate-Cut Bets

Turkey’s lira weakened the most in emerging markets on speculation Recep Tayyip Erdogan’s election as president will strengthen his hand in pressing for interest-rate cuts. Bonds fell and stocks advanced.

The lira lost 0.7 percent to 2.1658 per dollar at 7:15 p.m. in Istanbul, the worst performer among 24 developing-nation peers monitored by Bloomberg. The yield on two-year notes climbed 17 basis points to 9.51 percent, the biggest jump in almost a week. The Borsa Istanbul 100 Index gained 0.7 percent.

Erdogan, 60, who won the country’s first direct presidential election on Aug. 10, called for deeper interest-rate cuts as recently as Aug. 7 to spur economic growth expected to slow to 3.2 percent this year from 4 percent in 2013. Investors are also waiting for clarity on who will direct economic policy in the new government, with Deputy Prime Minister Ali Babacan’s future uncertain.

“Erdogan has been one of the big critics of monetary policy, urging the central bank to cut its key rates further,” Thu Lan Nguyen, a Frankfurt-based Commerzbank AG strategist, said by phone today. “It looks like the central bank is caving into the pressure, which will obviously now persist.”

Currencies in emerging Europe from Poland’s zloty to Russia’s ruble fell today after German investor confidence dropped to the lowest level since 2012 and as tension deepened in the conflict between Russia and Ukraine. The lira is one of the most vulnerable emerging-market currencies to such regional concerns, Nguyen said.

“Uncertainty regarding geopolitical impacts is a great concern for emerging-market currencies generally, in particular those which are in the region,” she said.

Political Risk

The Borsa Istanbul is up 15 percent this year, compared with a 6.1 percent gain for the MSCI Emerging Markets Index. Two-year yields declined 59 basis points in the period.

Political risk in Turkey is set to remain a credit weakness that may lead to a negative rating action, Fitch Ratings said in a statement yesterday. Once Erdogan takes the presidential post on Aug. 28, he’s required by Turkish law to sever ties with any party, including the Justice and Development Party from which he hails. Babacan reaches the end of his three-term limit in parliament next year.

Independent Policy

“Political uncertainty including the future of the current AKP economy team, warnings of rating agencies and regional issues, continue to take their toll on Turkish assets,” Ozgur Altug, chief economist at BGC Partners, said by phone today.

The central bank’s independence is also on their minds, according to Ozlem Derici, an economist at Deniz Yatirim in Istanbul. Policy makers, who more than doubled the main one-week repurchase rate in January, have since lowered it by by 1.75 percentage points in three cuts starting in May.

The lira, which has fallen 2.2 percent against the dollar this quarter, may decline another 1.6 percent by the end of the fourth quarter, according to the median forecast of 39 analysts compiled by Bloomberg.

“The market’s concern is that they will change Babacan with another deputy PM in charge of the economy and that the name will be against the central bank’s independence,” Derici said by phone.

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