June 21, 2019 / 3:34 PM / 3 months ago

Turkey's lira weakens on election, policy concerns

ISTANBUL, June 21 (Reuters) - Turkey’s lira declined some 1% on Friday as investors worried about the outcome of an Istanbul mayoral election on Sunday, as well as uncertainty over policymaking under President Tayyip Erdogan.

Turkey’s largest city will vote in the re-run after the initial poll in March was won by the main opposition. That result was annulled in May after weeks of appeals by Erdogan’s ruling AK Party that, along with its Islamist predecessor, had governed Istanbul for 25 years.

The re-run between the opposition CHP’s Ekrem Imamoglu and the AKP’s Binali Yildirim worried investors who say it has diverted attention from the implementation of reforms that Turkey announced in April.

There are concerns no matter what the outcome of the election is, said Jason Tuvey, an emerging markets economist at Capital Economics.

“If Imamoglu wins, the AKP may try to nullify the results again. If Yildirim wins, it will spark worries over the state of democracy, particularly given that he is trailing in polls,” he said, adding that other emerging markets currencies were also under pressure on Friday due to worries over rising tensions in the Middle East.

The lira stood at 5.8170 against the dollar at 1511 GMT, declining more than 1% from Thursday’s close of 5.7550. Earlier, it weakened as far as 5.8250.

Tuvey said Erdogan’s comments on monetary policy on Thursday and a central bank move to extend a liquidity facility to primary-dealer banks on Monday also hit sentiment towards the lira.

Erdogan said he remains opposed to the country’s tight monetary policy and pledged a “definitive solution” to soon lower the central bank’s key interest rate from 24%.

Turkey’s central bank said on Monday it will extend a liquidity facility to primary-dealer banks with an interest rate set at 23%, below its 24% policy rate, a move expected to lower the average cost of funding.

“It was seen in the past week that even if the election is out of the way, it won’t stop the deterioration in policymaking over the past decade,” Tuvey said.

The damage to the Turkish central bank’s inflation-fighting reputation that culminated in last year’s lira crisis has been years in the making, with its credibility having been progressively eroded over a full decade, two academic studies have found. (Reporting by Ali Kucukgocmen; Editing by Jonathan Spicer)

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