Lira buffeted by politics
LONDON – Analysts are busy revising down their year-end forecasts for the beleaguered Turkish lira in the midst of a political crisis that has left Prime Minister Bulent Ecevit’s government on the brink of collapse. US investment bank JP Morgan set the ball rolling earlier this week when it slashed its year-end lira forecast to 1.85 million to the dollar, from 1.68 million. The lira hit a new record low of 1,706,000 per dollar on the interbank market earlier this week, a loss of over 20 percent from the year’s highs of around 1,300,000 in mid-April. The lira has floated freely since February 2001 after the government bowed to pressure to abandon its dollar-peg regime, though the central bank intervened in the market on Thursday in an effort to staunch the losses. Likewise, analysts at UBS Warburg are also re-assessing their lira projections on the basis of the recent turbulence. «Our current year-end forecast is for 1.75 million (per dollar). The situation is too unsettled to make a change just yet, though clearly, given what’s already happened, a downward adjustment is likely,» said Alex Garrard, an analyst at UBS. Garrard said a new forecast would probably be in the 1.80-1.85 region. Turkey’s political crisis intensified over the weekend when the leader of the nationalist MHP party, Devlet Bahceli, broke coalition ranks to call for early elections. Bahceli’s comments set in motion a string of events leading to the resignation of Deputy Prime Minister Husamettin Ozkan, Foreign Minister Ismail Cem and over 40 other members of Ecevit’s Democratic Left Party (DSP). The market’s big fear is that political turmoil could fatally undermine Turkey’s $16-billion International Monetary Fund-backed economic reform program. Analysts point out that ongoing uncertainty in the political arena makes it difficult to forecast the future path of the lira with any degree of certainty, with market volatility expected to persist at least in the short-term. «Predicting short-term moves is pretty difficult… we’ve had some violent swings,» said Philip Poole, head of emerging markets research at ING. However, Poole said politics was likely to ensure the lira’s scope for recovery remains limited. «The troika (Cem, Ozkan and Economy Minister Kemal Dervis) is clearly very positive, but there are many other outcomes than them forming a government,» he said. «If Ecevit continues to hold on there could be further weakness,» added Poole. Ecevit dug his heels in yesterday, saying the current three-party coalition could remain until its term ends in 2004. While the general consensus among analysts is that the lira has plenty of scope for further losses, there are some dissenters who think its fall has now been overdone. Marco Annunziata, chief economist for emerging Europe, Middle East and Africa at Deutsche Bank, has raised his end-2002 lira target to 1.6 million per dollar, from around 1.5 million, but is relatively upbeat about recent developments. «The political situation is now moving in the right direction and moving very fast. However, if we do get early elections in October or November it will maintain some uncertainty,» he said, adding he was confident the election result would be market friendly, putting the reform process back on track.
