Turkey’s Lira Tumbles to Record Low on Post-Vote Policy Concern

The lira weakened to a record low as concern deepened over the lack of clarity in the direction of Turkish economic policy following June elections.

The currency fell as much as 1.5 percent to 2.7281 per dollar, extending this year’s depreciation to 14 percent, the most among 24 emerging markets tracked by Bloomberg. The Borsa Istanbul 100 Index dropped to a two-week low and government two-year notes declined, pushing yields to a six-month high.

Pressure on Turkish assets is mounting before parliamentary elections on June 7 as opinion polls show waning support for the ruling AK Party, from which President Recep Tayyip Erdogan hails. Deputy Prime Minister Ali Babacan, viewed by some as integral to the country’s economic management, is completing his three-term limit in parliament, raising questions as to who will replace him and the policies that will be adopted under a new administration.

“The main reason is the confused political landscape, with Erdogan losing support and the risk of populism re-emerging ahead of the general election,” Cristian Maggio, head of emerging-market research at Toronto Dominion Bank, said by e-mail of the selloff in the nation’s assets.

The lira weakened 1.4 percent to 2.7265 per dollar by 5:19 p.m. in Istanbul. The currency has declined this year as the Federal Reserve moves closer to raising interest rates for the first time since 2006, damping demand for riskier assets. Shares in Istanbul lost 1.2 percent on Wednesday, while the two-year yield increased 22 basis points to 9.22 percent.

Verbal Intervention

The AK Party is likely to achieve 42 percent of the vote, according to a survey by MetroPoll Stratejik ve Sosyal Arastirmalar published on Tuesday. That’s down from 49.8 percent in the 2011 elections. Erdogan has been lobbying for a majority big enough to enable him to alter the constitution to boost the powers of the president’s office.

Turkey’s central bank will discuss possible measures “to support the stability in financial markets” at an April 22 meeting on monetary policy, according to a statement on its website on Tuesday. Policy makers will consider lowering the rate charged for foreign-currency loans and a “measured” increase in the rate on required lira reserves of banks, it said.

While the verbal intervention initially helped the lira trim a drop of as much as 0.9 percent on Tuesday, the currency resumed declines in part on speculation political pressure will constrain central bank policy.

Erdogan and other government officials have called on the central bank to deepen reductions to borrowing costs to spur the economy, causing concern over governor Erdem Basci’s autonomy.

“The central bank has lost credibility and we think it will be forced into easing, or bashed by the political establishment in order to have a scapegoat ahead of the vote,” Toronto Dominion’s Maggio said.

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