Roundup: Turkish lira loses value amid political pressure and external factors

An unprecedented political pressure on Turkey's Central Bank has sent Turkish lire tumbling down against the U.S. dollar as investors are uneasy about the sustainability of independence in the bank.

That came on top of already lingering expectations among investors that the U.S. Federal Reserve will raise interest rates this year in the face of robust job growth, thereby supporting the value of dollar and reducing interest for bonds in emerging markets.

The lira started on Wednesday with 2.4970 after setting a new low on Tuesday at 2.5075 against the dollar.

The Central Bank Governor Erdem Basci, who has been managing the bank since 2011, has been under pressure to cut interest rates further, stimulate growth and decrease inflation. Many speculate he may even resign before his term expires in 2016.

"Recent incidents show that the Central Bank's management has indeed suffered as a result of this political pressure," Seyfettin Gursel, an economist, said, lamenting that the bank management is stumbling.

On Tuesday, lira continued to depreciate amid news that the governor moved out of public housing afforded to him by the government, triggering speculations that the rift grows between the bank and the government.

The bank has already cut interest rates in January by 50 basis points from its policy interest rate, lowering it from 8.25 percent to 7.75 percent in response to dropping of oil prices.

However, Turkish President Recep Tayyip Erdogan demanded deeper and quicker cuts and openly criticized the bank governor on several occasions.

So far, Basci did not respond to the criticisms and kept a lower profile, but he said on Monday that low inflation would only be possible with an interest rate hike. That may indicate that the bank will not make large cuts on interest rate on Feb. 24 when the monetary policy committee meeting will take place.

Deputy Prime Minister Ali Babacan, who is responsible for the economy, rushed to defend Basci, saying at the G-20 meeting in Istanbul that the Central Bank is governed by competent experts "who know their job very well."

Turkish Union of Chambers and Commodity Exchanges (TOBB) Chairman Rifat Hisarciklioglu praised Basci's management, saying he is one of Turkey's most successful central bank governors in the post-crisis era.

Erdal Saglam, another Turkish economist, believed domestic mistakes aggravated situation for Turkey and made its economy more fragile in contrast to other emerging markets.

"We are at the top of the list of developing countries, which alone reveals the dimension of our own mistakes," he noted.

BAKING WOES WORSEN FINANCIAL MANAGEMENT

Turkey's domestic woes complicate the Central Bank's battle to shore up the lira against the greenback that gained value across all emerging markets.

The regulators' takeover of Turkey's one of the largest and healthiest banks, Bank Asya, last month amid what the opposition described as politically-motivated also raised risk premiums for Turkey.

Opposition Nationalist Movement Party (MHP) leader Devlet Bahceli said on Tuesday that it was President Erdogan who unlawfully ordered the takeover, adding that the basic principles of economy have been disregarded, and that the real value of the money in individuals' pockets will further decline as long as the Turkish lira continues to depreciate against the US dollar.

"Any effort to undermine a financial institution in such a blatantly political way carries risks that investors will shy away from investing in a country where that happens," Steven A. Cook, an expert on Turkey at the Council on Foreign Relations (CFR) said.

Turkish business community was also critical of the president and other officials' interference into finance and banking industry.

Cansen Basaran Symes, chairwoman of the Turkish Industrialists and Businessmen's Association (TUSIAD), the wealthiest business club in Turkey, said recently the Central Bank's independence is paramount for the economy.

"TUSIAD hopes to see an end to the recent discussions about the bank's role that have confused the business society and the public," she remarked.

The head of Turkish Confederation of Businessmen and Industrialists (TUSKON), the largest business advocacy group in Turkey, highlighted the dangers for Turkish economy stemming from the fallout from Bank Asya.

Stressing that the some 60 percent of stock market shares are owned by foreigners, TUSKON president Riza Nur Meral said the takeover of the bank management led to loss of some five percent in the exchange. He said the move will scare investors away while sending the lira to lose its value further.

"How will we be able to compensate the current account deficit? When we cannot do that, the demand for foreign currency in Turkey will rise, increasing the inflation," he explained.

On Wednesday, the government announced that the current account balance in December was deficit of 6.8 billion U.S. dollars, making the deficit for year 2014 as 45.8 billion U.S. dollars which is still a high figure.

The drop in the current account deficit was mainly attributed declining in commodity prices especially oil as well as a slower economic activity in Turkey. Enditem