More turbulence is still expected this week for Turkish lira

THE BREATHER is over for the world’s most volatile currency.

After months of unremitting turmoil, trading in Turkey’s lira was relatively calm this week as local markets remained shut for a holiday. With trading set to resume today, investors should brace for more turbulence unless the nation’s policy makers adopt a more market-friendly approach, strategists say.

The lira plunged 37 percent this year, left vulnerable by runaway inflation, a deepening current-account deficit and policymakers’ reluctance to raise interest rates. Adding to the troubles were US sanctions on Ankara over the imprisonment of an American priest. If the trend seen after a similar holiday during Turkey’s 2001 currency crisis is anything to go by, count on volatility persisting.

“Relief will be short-lived and more action is needed,” said Guillaume Tresca, a strategist at Credit Agricole in Paris, who recommends that investors avoid the lira. “Turkish officials have to create a credibility shock.”

Turkey, while it’s raised rates by 500 basis points since April, needs to boost them further by more than 600 basis points to stabilise markets, according to Société Générale. President Recep Tayyip Erdogan’s administration says the turmoil is part of an economic attack by Washington and has resisted pressure to raise borrowing costs, a step that would likely curb economic growth.

This time, the exit plan appears murkier than in 2001.

Back then, the lira slumped after a peg to the dollar failed, and amid domestic political risks fuelled by a spat between Prime Minister Bulent Ecevit and President Ahmet Necdet Sezer. In reaction, officials including newly appointed economy chief Kemal Dervis – hired from the World Bank – used a week of holidays to overhaul plans and secure additional financing. That didn’t stop the currency from almost doubling losses in the remainder of the year.

Now, power is concentrated in the hands of Erdogan. And Turkey is embroiled in an exchange of sanctions, grievances and recriminations with the US. – Bloomberg