Lira Sinks Most in Emerging Markets Amid Power Grab

  • Turkey's currency depreciates for fourth straight day
  • AK Party to seek `mini' constitutional change: Erdogan adviser

The Turkish lira led losses across emerging markets and stocks fell on mounting concern President Recep Tayyip Erdogan’s attempts to tighten his grip on power will make the nation’s economic and monetary policies less predictable.

The currency, which has weakened all but one day this month and wiped out this year’s gains, dropped 0.5 percent to 2.9644 per dollar as of 4:18 p.m. in Istanbul, the most among developing nations. The ruling AK Party will push in June for a “mini-constitutional change package” that will allow the president to also be its leader, said Burhan Kuzu, a member of the party’s central board and a former adviser to Erdogan. The Borsa Istanbul 100 Index declined a second day.

The amendment is part of Erdogan’s plan to turn his largely ceremonial role into an executive presidency, which may mean the party he co-founded could seek a snap election to win the parliamentary seats needed to change the constitution. With Prime Minister Ahmet Davutoglu poised to step down, investors are now bracing for Erdogan to increase pressure on the central bank to cut interest rates more aggressively and await clarity on potential changes in the economic administration.

“Reduced predictability on the future direction of foreign, monetary and fiscal policy, and structural reform are going to weigh on Turkish assets in the coming months,” JPMorgan Chase & Co. analysts including Istanbul-based economist Yarkin Cebeci wrote in an e-mailed report on Tuesday. The lender last week moved to an underweight position in the lira and sovereign credit, and a market weight position in bonds, citing heightened political uncertainty.

Rising Tension

The lira selloff that began last week deepened after rising tension between Erdogan and Davutoglu culminated in the premier announcing on May 5 that he will step down. The currency fell 5.7 percent this month, the most across 24 emerging markets after South Africa’s rand.

“Markets were positioned the wrong way,” Luis Costa, Citigroup’s London-based chief strategist for eastern Europe, the Middle East and Africa, said by e-mail. “The political background has taken a more negative turn, as the AK Party sets up a path towards potential snap elections.”

The Borsa 100 declined 0.2 percent, led by Turkcell Iletisim Hizmetleri AS’s 2.2 percent drop. The yield on the 10-year bond retreated five basis points to 10.01 percent, after rising as much as 10 basis points earlier.

Traders may be seeking bargains after the market rout, “as the global backdrop remains benign,” Erkin Isik, a strategist at Turk Ekononmi Bankasi AS, said by e-mail. While comments from Federal Reserve officials signaled a potential for higher U.S. rates, the futures market sees only a 4 percent chance of an increase this month, according to data compiled by Bloomberg.

Sour Relations

The “souring” of Turkey’s relations with the European Union is another concern for investors, Costa said. Turkey was offered a deal that would allow Turks visa-free access to the continent, as well as financial aid and the prospect of a renewed effort toward EU membership, in return for agreeing to take back refugees, which helped boost investor confidence in the nation this year.

Kuzu on Wednesday said Turkey would send refugees to Europe if the European parliament makes a “wrong decision” as it considers the proposals. The comments come less than a week after Erdogan rebuffed an EU demand that Turkey narrow its definition of terrorism.

(Corrects to show Burhan Kuzu is a former adviser to Erdogan in second paragraph.)
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