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Investors left guessing as Turkey rules out capital controls

ANKARA: Turkey ruled out capital controls Thursday as it battles to defend the lira and tame inflation, leaving investors guessing as to what an “out of the ordinary” economic package touted by Prime Minister Recep Tayyip Erdogan might involve.

Finance Minister Mehmet Simsek said there was no question of restrictions on capital movements after an emergency interest rate hike late Tuesday failed to lift the lira currency substantially off record lows.

Erdogan, battling a corruption investigation shaking his government months ahead of elections, was quoted late Wednesday as saying work on “a Plan B or a Plan C” for the economy may be announced in the coming days or weeks.

He is committed to maintaining growth as Turks prepare to vote and has railed against what he describes as an “interest rate lobby” of speculators seeking to push up rates and stifle Turkey’s economic progress.

“We want it to be something out of the ordinary. Globally there are practices,” Erdogan said of the plans, without elaborating, according to the pro-government Yeni Safak newspaper.

Yigit Bulut, a former TV commentator appointed by Erdogan as his economic adviser last July and best known in Turkey for suggesting the prime minister’s enemies were seeking to kill him by telekinesis, sought to reassure investors.

“If a prime minister who has produced the brightest economic developments in the history of the republic says ‘I’m conducting work, there are examples globally’ it is indisputable that this is very positive work for markets,” he said on Twitter.

The central bank raised all its key interest rates by around 500 basis points Tuesday, ignoring opposition from Erdogan and stunning investors with the scale of the move, initially sending the lira up sharply and triggering a broader revival in appetite for battered emerging markets.

But the rout resumed Thursday, with the U.S. Federal Reserve’s decision to withdraw more of its monetary stimulus and weak Chinese data restoring the risk-averse mood.

The lira was trading slightly weaker at 2.2560 by 14:00 GMT from 2.2471 late Wednesday.

Turkey’s central bank said it had tried to “front-load” its monetary tightening with this week’s rate hike but said it may tighten liquidity further if needed, according to the minutes from Tuesday’s meeting, published on its website.

Turks appear to be betting against it.

Foreign portfolio outflows have remained relatively steady in recent weeks, suggesting much of the strong dollar demand is coming from Turkish firms and households, stocking up on hard currency as a potentially turbulent election period is approaching.

Erdogan has overseen strong economic growth since coming to power in 2002, transforming Turkey’s reputation after a series of unstable coalition governments in the 1990s ran into repeated balance of payments problems and economic crises.

 
A version of this article appeared in the print edition of The Daily Star on January 31, 2014, on page 5.

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Summary

Turkey ruled out capital controls Thursday as it battles to defend the lira and tame inflation, leaving investors guessing as to what an "out of the ordinary" economic package touted by Prime Minister Recep Tayyip Erdogan might involve.

Erdogan, battling a corruption investigation shaking his government months ahead of elections, was quoted late Wednesday as saying work on "a Plan B or a Plan C" for the economy may be announced in the coming days or weeks.

The central bank raised all its key interest rates by around 500 basis points Tuesday, ignoring opposition from Erdogan and stunning investors with the scale of the move, initially sending the lira up sharply and triggering a broader revival in appetite for battered emerging markets.


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