ANKARA, Aug. 29 (Xinhua) -- The Turkish lira weakened against the U.S. dollar this week due to the threat of military intervention in Syria, next year's local elections and the U.S. decision on stimulus, analysts said.
The lira fell to a record low of 2.07 to the dollar Wednesday before recovering to 2.05 by the end of day as Turkey's central bank vowed to defend the currency.
The Istanbul stock market also declined by 0.10 percent the same day, with its main share index dropping to 63,887 point, the lowest this year, before rebounding to 65,452 at the close.
To soothe concerns in the market, Central Bank Governor Erdem Basci said Tuesday he did not intend to hike interest rates to defend a sliding lira, and the bank had 40 billion dollars in reserves to shore up the currency.
He added the bank would intervene defensively as needed to reduce exchange rate volatility.
However, Turkish analysts were not as confident of the bank's ability to support the lira.
"I am not as optimistic as the Central Bank governor," economist Seyfettin Gursel said, noting the decline was likely to be permanent.
He expected the fall to have a positive impact on narrowing Turkey's chronic current account deficit, which hovers around 7 percent.
"But in the short run, consumer spending will be adversely impacted based on 'wait and see' behavior," Gursel said, adding "as a result, growth may fall further in the second quarter and especially in the third quarter."
Controlling the current account deficit may not be easy as Turkey, a net-energy importer, will suffer from the surge in oil prices, which have climbed to a six-month high at about 117 U.S. dollars a barrel. Any further increase will lift the country's current account deficit.
Deputy Prime Minister Ali Babacan, who is responsible for the economy, acknowledged Wednesday that Turkey was vulnerable to fluctuating energy prices.
But he said Turkey was very strong on budget discipline, and his country's budget deficit was very low compared to other emerging economies.
The budget deficit in Turkey is well under 3 percent and the public debt to GDP ratio is around 37 percent and trending down.
Babacan described recent developments in the world economy as part of the normalization process, adding his country would monitor the situation very closely.
Ibrahim Ozturk, an economic analyst, warned Turkey's outlook was also worsening, which played into weakening of the U.S. dollar.
He said Turkey had confronted a long list of challenges, including worsening economic prospects at home and abroad, the current account deficit, the upcoming three elections cycle, and inflation.
"Among the first reactions to this was the cancellation of a 12-billion-U.S. dollar project to build coal-fired power plants in Turkey by the Gulf," he said.
Other economists point to the pattern in emerging countries that have experienced slides in their currencies against the dollar, saying Turkey is not alone.
"The Federal Reserve's decision to withdraw liquidity has resulted in a real drop in the exchange value of currencies in countries like India, Brazil, South Africa and Indonesia," said Yasar Sungu, another economist.
He said Turkey stood out from the crowd, with its highly flexible fiscal monetary policy.
Yasar predicted the central bank would lift interest rates to as high as 7 or 7.75 percent in coming months to prevent the slide in the lira. "The rates will not drop below 6.75 percent as long as inflation stays above 6.2 percent," he said, echoing Basci's optimism.
The Central Bank has a year-end target for inflation of 6.2 percent.
"We will not be using our interest rate weapon against the exchange rate. We are very clear on that and we have said there will not be any uncertainty about interest rates," Basci said.
For those who advocate low interests rates and a weak lira, Basci's remarks are welcome news.
Economy Minister Zafer Caglayan, whose portfolio includes boosting Turkey's exports, said the central bank did not need to support the currency and the 2 lira-to-the-dollar level it breached Tuesday was only a psychological barrier.
Turkey like other emerging markets has felt the impact of the U.S. decision to start reducing its massive bond-buying program. The move is expected to reduce liquidity in developing economies.
Turkey may also feel the brunt of any international intervention in Syria, with which it shares a 910-km border, with the conflict fueling further uncertainty over the Turkish economy.