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News Analysis: Political instability behind Turkey's financial market fluctuation

English.news.cn   2014-01-27 18:38:24

ISTANBUL, Jan. 27 (Xinhua) -- Turkey's political instability is behind the tough fluctuation of the financial market with the Turkish lira losing 29 percent of its value against the U.S. dollar, 35 percent against the euro and 38 percent against the British pound since last May.

Turkish economists noted that after Dec. 17 corruption operation, the power struggle between the ruling Justice and Development Party AKP and the U.S. based cleric Abdullah Gulen's Hizmet movement has shaken the whole country, creating a massive mistrust in the markets.

Dozens of government officials and prominent businessmen close to Turkish Prime Minister Recep Tayyip Erdogan including sons of three ministers were arrested on graft charges.

"As a result, Turkish markets have been witnessing a considerable amount of withdrawal of foreign inflow after the operation, which in turn ignites the fluctuation in the exchange rates," the head of Istanbul Association for Economic Studies ( IEAD) Mehmet Huseyin Bilgin told Xinhua.

Atilla Yesilada, Turkey advisor to Global source partners, told Xinhua that at first the unhealthy economic conditions were not instinct to Turkey. Many emerging markets that have foreign currency shortages have been suffering from the same symptoms for a while.

"For the emerging markets such as the so-called fragile five Brasilia, Turkey, South Africa, Indonesia and India, they all share similar symptoms. They will all have elections this year and they all have a large current account deficit and furthermore they all have been suffering from chronic political instability," he said.

However, the situation in Turkey distinguished by a sudden war erupted between the Gulen movement and AKP, influencing all the segments of the society, according to Yesilada.

During the week of Dec. 27, foreign investors had sold 154 billion dollars of bonds leading the cash flow to regress to 0.9 billion dollars. The same amount in the previous year was 6 million dollars.

The Turkish central bank statistics show that Turkey's short- term outstanding external debt has reached to 130 billion dollars by the end of November 2012. Private sector's external debt with an increase of 21.1 percent rose up to 37.9 billion dollars.

"The main reason behind this increase in exchange rates is the political instability and the high tension in the politics," Bilgin said.

He noted that since this is a politically oriented fluctuation, any intervention of the central bank would be effective only for the short time period. "Until the political stability would be achieved, the exchange rates will be continuing to increase," he added.

"Those who have debts in dollars will be affected much of course. There could be some bankruptcies in the mid term. But this cannot be considered as an economic crisis," he said.

In the meantime Turkey's central bank for the first time in two years intervened in the foreign stock markets last week to prevent the down stroke of the lira against dollar even further. However, despite the intervention lira sank to 2.3490 against dollar on Monday while euro hit 3.1960.

On the other hand, accusing the central bank of not increasing the interest rates Yesilada said, "In Turkey there is another angle. Turkey's central bank is reluctant to interrupt the fluctuation by raising the interest rates."

"When the local currency has been under serious attack, when everyone is selling that currency one of the main measures that can be taken would be the central bank to raise the interest rates, which makes that currency rate attractive," he said.

"Increase in interest rates is very necessary until the investors see the political stability and return to the Turkish markets. Ankara should do all it can do to end this confidence crisis," he said.

Unfortunately three months left to the election but central bank refrains to use this particular weapon, Yesilada added.

He described the situation as a very complicated one in which the fundamental value of currency has been declining. "There is a panic environment, everyone abandoning the lira," he said.

The official of Cetin Exchange office here in Taksim Square in Istanbul told Xinhua that everyone waits for the political stability to be re-established in the country.

"I think that the central bank also waits for the political conditions to be improved and does not increase the interest rates, " he said.

Editor: Shen Qing
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