Turkey seeks to calm US investor nerves as lira plunges

[ANKARA] Turkey's prime minister and his economic team sought on Wednesday to calm the nerves of top investors in New York who hold more than 20 per cent of the main Istanbul stock index, after President Tayyip Erdogan's tirades against the central bank helped send the lira to record lows.

Mr Erdogan has repeatedly attacked the bank over its failure to cut interest rates as sharply as he wants ahead of a June general election, telling its governor and Deputy Prime Minister Ali Babacan, who is in charge of the economy, to "shape up".

His comments have fuelled uncertainty about the future of both Babacan, an anchor of investor confidence, and bank Governor Erdem Basci. Ministers have tried to reassure markets that neither is about to quit.

The lira dropped to an all-time low of 2.5705 against the dollar as Economy Minister Nihat Zeybekci, an Erdogan loyalist not among the New York delegation, renewed calls for sharper rate cuts.

The central bank has price stability as its core mandate, and it fears, along with most economists, that sharp interest rate cuts would stoke inflation, already running well above the bank's 5 per cent target.

Mr Babacan, Prime Minister Ahmet Davutoglu and Finance Minister Mehmet Simsek attended a luncheon organised by Goldman Sachs.

Mr Davutoglu spoke for nearly half an hour to about 50 investors and bankers, rehashing past achievements and reforms, said one source who attended the luncheon but spoke on condition of anonymity. "They were trying to explain their position and how they are coping with Europe's downturn and the complex neighbourhood they are located in for their problems. These guys are essentially fighting the business cycle," said the source, a top veteran emerging market investor. "He was asked about the bashing of the central bank governor, and deflected the question, saying other countries, including places like Germany, criticise the central bank," the source said.

Other meetings scheduled are with Citi and Bank of America Merrill Lynch, on Wednesday and Thursday, officials in the prime minister's office said. "It seemed a non-deal road show of sorts, like they were trying to dissipate the impact of Erdogan," said a second source.

The investors they will meet hold an estimated 22 per cent of Turkey's top-100 share index, according to Isik Okte, investment strategist at Istanbul-based TEB Invest. "The impact on the economy of President Erdogan's statements is triggering concern," one senior Turkish economy official told Reuters ahead of the meetings.

Sentiment toward the lira was not helped by data on Tuesday showing annual inflation rising to 7.44 per cent, sharply above the bank's 5 per cent target, limiting its room to cut rates as sharply as Mr Erdogan wants.

Commenting on the data, the bank said core inflation indicators had continued to improve. Economists expect it to trim its policy rate by a further 25 basis points at its next meeting on March 17, if the lira does not tumble sharply.

With the lira repeatedly hitting new lows and the dollar expected to keep strengthening, the central bank's hands appear tied. Reluctant to hike interest rates, it also so far has not significantly increased its dollar sales to the market, an option it has used in the past to defend the currency.

The lira's falls have filtered through into equities, with the main Istanbul stock index falling 2.6 per cent to its lowest level in 11 weeks.

Mr Erdogan's pressure for rate cuts is driven by flagging economic growth, which slowed to 1.7 per cent year-on-year in the third quarter and is now expected to amount to around 3 per cent in 2014 as a whole, below a 4 per cent target.

His rhetoric is popular with a class of businessmen who have thrived on cheap loans and political stability over the past decade and have formed the bedrock of support in his successive election victories, meaning pressure on the central bank is unlikely to ease before the June vote.

The debate on rates is not the only source of market nerves.

Ratings agency Standard & Poor's said last month's management takeover by regulators of Islamic lender Bank Asya showed the potential for political risks to spill over into the financial system.

But it said the June parliamentary election, at which Mr Erdogan wants the ruling AK Party to secure a stronger majority to help him create a full presidential system, should not pose a particular source of risk for banks.

REUTERS