ANKARA - Turkey faces another week under pressure in its fight to shore up the lira as well as growth.
The country is in the front line of emerging economies hit by an outflow of investment because the US Federal Reserve central bank is signalling that it will soon curtail the injection of stimulus funds which have supported the US economy, and growth abroad, and have helped to keep interest rates low.
The Turkish central bank ended last week on the back foot after a rate rise, and intervention on the foreign exchange market, failed again to halt a fall of the lira and share prices, and a rise of the 10-year borrowing rate.
Meanwhile, the government took the line that the US Federal Reserve was fuelling uncertainty, that Turkey would emerge stronger from the turmoil and that the lira would eventually recover.
The events of last week demonstrated changes of direction by the central bank and a dilemma over growth for the government.
At the central bank, declarations of determination to tighten monetary policy as needed have hardened since it announced emergency measures at the beginning of July.
The government has also modified its tone, since three months ago Prime Minister Recep Tayyip Erdogan attacked those who argued for higher rates against a background of serious civil unrest seen as his greatest challenge since coming to power in 2002.
Before the central bank, statutorily independent, announced its emergency measures including the use of foreign reserves to buy lira, Erdogan had said repeatedly that the bank would do everything necessary to hold rates down, hoping to sustain growth.
High growth unduly dependent on credit
But even then analysts were warning that high growth rates which have propelled the Turkish economy and its ambitions in the region, were unduly dependent on credit and had generated a worrying deficit on the balance of payments on current account.
The economy was already "fragile" because of excessive credit and the payments deficit financed mostly with short-term foreign funds, journalist Ege Cansen wrote in the Hurriyet daily on Saturday, arguing that the expected change in US policy had highlighted chronic problems.
Strains had been evident in 2011 when the payments deficit reached 10 per cent of national income and policy-makers had "failed to implement the soft-landing project" to reduce the budget deficit, limiting credit expansion and allow the lira to fall, he said.
Emerging Turkey, with a population of 76 million and the world's 17th-biggest economy, has achieved strong economic growth in the last decade after severe financial crises and IMF rescues, and is now an economic powerhouse in its region.
Erdogan's Islamic-rooted Justice and Development Party (AKP), which came to power after the crises and won three elections in a row, has built its big regional ambitions on high growth. But now the government is expecting growth of just 4.0 per cent this year, half the rate of two years ago.
Despite the turmoil, the government was reassuring. AKP spokesman Huseyin Celik said on Thursday that in a global world, everyone was exposed to events abroad. "When some sneeze at the New York Stock Exchange, some others at the Istanbul Stock Exchange could catch a cold." There was no room for pessimism, he said, and the government would take "measures".
Last week, the central bank decided to raise its overnight rate by 0.50 percentage points to 7.75 per cent, having raised it by 0.75 points at the end of July.
But it left its benchmark repurchase rate at 4.5 per cent, and the rate increase coupled with intervention on the foreign exchange market had little effect on the lira, which has slid by some 12 per cent since February and was trading at 1.9914 to the dollar at Friday's close.
Financial analysts said that the measures taken by the central bank were too complex, and they suggest that the bank may call an urgent policy meeting in the next few days.
At HSBC Asset Management Turkey, senior investment strategist Ali Cakiroglu said that monetary policy could not compensate fully for the vulnerability of Turkish assets, adding that it seemed "highly likely" that the central bank would hold an unscheduled policy meeting
He suggested that a sizeable rate increase, coupled with clear messages on the outlook of the monetary policy, might help to stabilise the lira.
But he warned: "All in all, it seems that Turkish assets might remain under selling pressure, unless the depreciation of the Turkish lira stops in the coming days."