Turk minister: Lira is probably overvalued

LONDON – The Turkish lira is overvalued but the government has no target for the level of the currency and does not interfere in the decisions of the central bank, Turkey’s economy minister said yesterday. «The lira is probably overvalued to some extent,» Mehmet Simsek said. «The currency is a bit strong, the lira is rich.» But he told Reuters: «We have a floating exchange-rate regime and we are not in the business of micro-managing the currency. We do not have a target for the lira.» The currency is trading just off six-year highs against the dollar having appreciated nearly 20 percent so far in 2007 as investors have been lured by the country’s double-digit yields. The lira’s rise has elicited protests from exporters while recent media reports have hinted at tension between the government and the central bank over high interest rates. Simsek, speaking on the sidelines of an investment conference in London, denied there was a conflict. «It is not true that we meddle with the central bank, I am delighted that we have a central bank that is independent,» he said, adding the government had done its bit to fight inflation via a tight fiscal policy. Turkey’s year-end inflation target is 4 percent but the consumer price index rose 7.7 percent year-on-year in October, with oil and food contributing to a high headline number. «I am as convinced as any hawkish central banker that this country needs to lower inflation on a sustainable basis,» Simsek said, but added: «The central bank has maintained very high interest rates.» He was referring to the 425 basis points of rate tightening last year which has contributed to the lira’s rise. The central bank has started cutting rates, on Wednesday lowering them 50 basis points to 16.25 percent. The move was the third rate cut in a row this year. Current account gap Simsek said the government’s 2008 projection for the current account deficit of $39.24 billion, or 7.5 percent of gross domestic product, was calculated on an oil price around $77 per barrel. Oil prices are currently trading around $90 per barrel. Oil imports are a major contributor to the current account gap but Simsek said it was not a disaster yet for the economy. «The high oil price is negative for the current account deficit and for inflationary targets. Is it negative? It is. Can we live with it? We are able to live with it.» The government is looking at alternative sources of energy such as windpower and nuclear energy, he added. Much of Turkey’s reform program has been driven by its $10 billion loan deal with the International Monetary Fund which helped it recover from a 2001 crisis. This will expire next year and analysts say that while Turkey does not need the cash, a follow-up deal will be useful. Asked if Ankara wanted to extend its arrangement, Simsek said he would prefer a strong relationship with the IMF but added: «We have so much on our plate right now that it is premature to be discussing the nature and format of our future relationship with the Fund.» Simsek said the government was committed to accelerating the privatization process, including the second stage of Halkbank’s sale and the privatization of energy and tobacco companies and infrastructure. He declined to give a timescale. Turkey is reliant on foreign investment flows to plug its current account deficit and expects $25 billion in FDI in 2007. Simsek voiced worries that these flows could take a hit if the ongoing credit turmoil escalates. «If there is a significant downturn in global growth, this could harm risk appetite and FDI flows,» he earlier told a conference.