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Lira falls amidst Turkey’s ongoing political upheaval

6 January 2014

The Turkish lira fell once more in the face of the US plans to curtail financial input into certain emerging economies.

Amidst the ongoing political upheaval in Turkey, the lira fell by 0.6% today, hitting a new low at TL 2.1916 against the dollar.

Turkish Finance Minister, Mehmet Simsek, a former Merrill Lynch economist admits that the plummeting lira, “obviously has some negative implications for the Turkish economy”, but remains optimistic that the lira would potentially hits its target growth of 4% this year.

However, many investors remain sceptical as Turkey is one of the so called “fragile five” – the newly developing markets, which will be seriously affected by budget plans, revised in December 2013 by the US which will reduce its bond-buying programme.

Turkey has one of the biggest current account deficits of any major economy, which means it is dependent on continual inflows of dollars either from fund managers or foreign company investments.

Adding to its difficulties, political tensions have increased over the past year, with an extensive corruption probe into alleged bribery, smuggling, the fixing of tenders and illegal construction allegedly involving two sons of cabinet ministers.

Prime Minister Erdogan, in his usual outburst of rhetoric and accusation, has pointed a finger at police and prosecutors, claiming that they are exercising a political vendetta. In this turbulent atmosphere, many asset managers worry that the political environment could deteriorate as the country gears up for elections later this year.

Mr Simsek admitted that financing the current account deficit will be “more challenging” in the coming two years.

“You have to live with relatively more moderate growth,” he said.

“This means you have to allow adjustments in currency, in inflation, in wages. We are not going to fight the markets, we are going to let the adjustment run its course and there will be some correction in imbalances and certainly, possibly, a longer period of sub-trend growth,” he added.

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