Turkey's long-suffering lira got a reprieve on Friday after the US Federal Reserve left interest rates unchanged, but political uncertainty and a grim outlook for growth meant the gains were likely to be short-lived. A rate increase might have increased the chances that Turkey's central bank would also tighten at its meeting next week, something political pressure has kept it from doing.
"If the Fed had hiked rates yesterday, one of the uncertainties would have been gone, giving room to the central bank for a rate corridor tightening on September 22," said Pinar Uslu, a banking strategist at ING. Turkey's central bank is scheduled to hold its monthly monetary policy committee (MPC) meeting next Tuesday. All 16 economists polled by Reuters have said they expect the bank to keep rates unchanged.
The Fed's decision helped emerging currencies considered vulnerable to higher US rates, such as the lira. Higher US rates would make some dollar-denominated assets more attractive, prompting investors to sell emerging market currencies to buy dollars. The lira was at 2.9830 to the dollar at 1419 GMT, firmer from its close of 3.0120 overnight. The dollar has strengthened about 28 percent against the lira so far this year. The main BIST 100 share index was little changed at 74,967.49.
Fitch ratings agency, in a pre-scheduled ratings review left its Turkey rating at BBB- and its outlook "stable" on Friday, but noted that the country's political outlook had deteriorated. The agency cited political uncertainty resulting from a June 7 election and the breakdown of the Kurdish peace process as reasons for the deterioration. Confidence in Turkey has been hurt by political uncertainty after the AK Party founded by President Tayyip Erdogan failed to secure a single-party majority in a June election. Turkey now faces a November 1 snap election.
Sentiment has also been hit by fighting between security forces and militants of the Kurdistan Workers Party since the collapse of a ceasefire in July. In an interview late on Thursday, former President Abdullah Gul cited the decline in foreign investor confidence as one of the problems facing Turkey. "This tension and stress of today continuing is very costly for Turkey," Gul said. "For Turkey to grow, others need to invest in Turkey. And that is (only possible) when confidence and stability are expected, when the law really increases confidence."