May 10, 2018 / 10:10 AM / 15 days ago

Breakingviews - Turkish politics will subvert currency defence

LONDON (Reuters Breakingviews) - Turkey’s president is pursuing contradictory goals. Tayyip Erdogan wants to support the sagging lira. That would require measures to curb inflation and the current account deficit. However, his efforts to pump-prime growth, especially before June elections, will achieve the exact opposite.

Turkey's Prime Minister Tayyip Erdogan addresses his supporters during a Mother's Day event

The Turkish currency has been one of the hardest hit during a recent bout of weakness in emerging markets and fell to a record low of 4.3780 against the dollar on Wednesday. Later the same day, Erdogan and his economy team said they would respond with measures to shore up the currency, but their declaration may not reassure investors.

Turkey wants to reduce the pressure on the exchange rate and tackle inflation, which is running at nearly 11 percent, according to a statement issued by the president’s office on Wednesday. The best way to do that would be to hike interest rates progressively and scale back expansionary fiscal policies that risk overheating the economy. Turkish GDP growth more than doubled in 2017, to 7 percent, while the current account deficit widened to 5.5 percent of GDP from 3.8 percent a year earlier, according to IMF data.

But there is little sign that Erdogan is inclined to tighten policy by enough to reassure investors. Wednesday’s statement said Turkey would stick with growth-focused economic policies. That may have something to do with presidential and parliamentary elections that will be held on June 24, more than a year before they were scheduled. The elections will usher in Turkey’s new executive presidential system that will concentrate more powers in Erdogan’s hands.

But even after the vote is out of the way, it’s doubtful whether a politician who has called himself an “enemy of interest rates” will tolerate the sort of monetary policy tightening that would be required to restore investors’ confidence in the lira. Broad-based strength in the dollar and higher U.S. bond yields are making investors more cautious about piling into emerging markets. As asset managers grow more prudent, they want policymakers to show the same virtue.

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