Turkish president Recep Tayyip Erdogan’s attempt to take control and mount terrorist threat has begun to alarm investors, sending the Turkish lira down 4 percent to an all-time low.
The lira Turkish traded at 3.93 to the dollar, down 12 percent since the beginning of January, indicating its worst performance since a failed coup in July which prompted a purge that has ensnared corporates, business leaders and more than 100,000 civil servants. It shed 17 percent of its value against the dollar in 2016.
Since the November election of Donald Trump as U.S. president, all emerging markets have suffered with investors pulling cash out in anticipation of rising global instability and rising interest rates in the developed world.
But turkey has become one of the most fragile, because of high political risk, substantial foreign currency-denominated corporate debt and low central bank reserves to defend its currency. Turkey’s entanglement in Syria, plans by Mr. Erdogan to concentrate power in the presidency and a spate of terrorist attacks by Islamist and Kurdish militants have all rattled investors.
With declining reserves, analysts believe the only solution is an increase in official interest rates by the central bank. But Mr. Erdogan has long accused high interest rates as brake on Turkish growth, depicting them as a conspiracy against the country occasionally.
He has demanded lower interest rates to jump-start an economy that has effectively stalled. It shrank 1.8 percent in the third quarter of 2016, while consumer confidence, manufacturing and credit growth all fell as inflation soared.
Mr. Erdogan’s government has blamed the currency meltdown on speculators, calling it an “economic coup”. His government called Moody’s, the rating agency, economic terrorists after it warned this week that Turkish banks’ non-performing loans could climb to 4 per cent.