Turkey Warns on Growth as Pressure on Economy Rises

Turkey sent a new signal of pressures squeezing its economy on Wednesday, warning it may cut the growth outlook a day after a juggling act with interest rates to shore up the lira.

The moves came just a week after Prime Minister Recep Tayyip Erdogan sought to reassure investors that their capital was safe in Turkey, where weeks of deadly protests had posed the biggest challenge faced by the Islamic-rooted government during its decade-long rule.

Finance Minister Mehmet Simsek said that the growth forecast of 4.0 percent this year, half the rate two years ago, might have to be lowered because of U.S. monetary policy and recession in the eurozone.

The minister, speaking on news channel NTV, referred to signals from the United States that the Federal Reserve will eventually wind down special injections of money to stimulate the U.S. economy.

Some of this money had gone into emerging markets in search of higher returns, but has now begun to flow out, pushing down emerging stocks and currencies and raising their borrowing rates.

Simsek said: "Fed decisions and the international market conditions have triggered risks for a (growth) downgrade."

Weak demand from the debt and recession-hit eurozone, Turkey's biggest trading partner, was also hurting Turkish exports, he said.

Turkey, which has grown to become about the 17th-biggest economy in the world in the past decade after a severe financial crisis and IMF rescues, remains extremely vulnerable to rapid flows of foreign capital.

Investors were also jittery after weeks of protests which began on May 31 after police brutally broke up a peaceful sit-in in Istanbul.

The minister's warning came the day after the central bank raised the overnight rate by 0.75 percent to 7.25 percent but held the key rate at 4.5 percent to which it was reduced in May.

The lira then rallied.

The bank had already signaled a change of direction on rates, which would normally raise the attractions of the lira and retain capital but also crimp economic activity, and its solution had been broadly expected by analysts.

The policy statements are seen as reflecting various pressures: the government wants low rates to support growth, while some circles in Turkey have argued for a rate rise to support the lira.

In May, the prime minister attacked them as "speculators" and the "interest rate lobby".

But foreign analysts have been strongly skeptical for weeks that Turkey is on top of external pressures, a balance of payments deficit and unease over serious civil unrest in May and June.

-- Analysts see rate rising further --

Meanwhile the bank, formally independent on monetary policy, is committed to selling foreign currency to bolster the lira and reassure investors.

This unorthodox measure was launched two weeks ago when the lira fell to a record low level of 1.9740 to the dollar.

Late on Wednesday the lira was being traded at 1.9171 to the dollar.

The latest reported figure for the amount of this intervention was about $6.0 billion.

Analysts at Societe General bank in London said on Wednesday that this policy had "appeared unable to stop" heavy selling pressure while depleting valuable reserves of foreign exchange, which another analyst had put at about $45 billion when the intervention began.

Analysts at Barclays bank said that the central bank might now hold its rates in August. But if the U.S. Fed began to tighten its policy in September, Turkey may have to raise its rates by 1.0-1.5 percentage points in the following months.

Capital Economics commented that the lira and Turkish dollar bonds had switched from being among the best performers in the emerging Europe region earlier this year to become the worst performers.

"We think rising external financing needs will keep the lira under pressure and we expect it to drop to 2.05 to the dollar by the end of 2014."

Capital Economics had noted on Tuesday "government pressure to keep interest rates down" and that "a severe sell-off in the currency could see rates raised by up to 500 basis points (5.0 percentage points) in this cycle."

In mid-July, a statement from the Erdogan's office assured: "The central bank will act with determination to take all necessary measures ... We have always supported all investors who have capital in Turkey, and we shall continue to do so."