President Recep Tayyip Erdogan will be under pressure to act to ensure the deterioration in relations with the US does not further weaken the Turkish economy © AP
The Turkish lira and Borsa Istanbul fell on Monday as investors digested the news that the US had suspended the processing of most new visas in Turkey.
The decision — at least temporarily — puts the Nato ally on a list of pariah states such as North Korea, Iran and Libya whose citizens face restrictions on travel to the US.
The lira trimmed losses of as much as 6 per cent in thin overnight trading to hover at 3.705 to the dollar in the afternoon, about 2.6 per cent lower. The Borsa Istanbul 100 Index fell 4.7 per cent, then recovered some losses to sit 3.2 per cent down in the afternoon, although it is still close to the record highs of the past few months.
Bond yields on the 10-year note rose — a further temptation for overseas investors who have flooded Turkish markets.
The US move came after a second embassy employee was arrested and local pro-government newspapers leaked photographs, home addresses and evidence purportedly showing links between the employee and hundreds of exiled Turkish prosecutors.
The prosecutors had run an anti-corruption investigation that nearly toppled the then prime minister Recep Tayyip Erdogan’s government in 2013. They were accused of links to Fethullah Gulen, a self-exiled cleric living in Pennsylvania who is reviled by Mr Erdogan, and of fabricating evidence. All eventually fled the country.
The Turkish Central Bank on Monday said foreign exchange liquidity was adequate. Tusiad, a leading business group, called for diplomacy to resolve the “visa crisis” before it harmed economic relations between the two countries.
Shares in Turkish Airlines and low-cost rival Pegasus fell 8 per cent and 6.5 per cent respectively during Monday afternoon, while Halkbank, a government-owned lender, fell more than 5 per cent.
The US move — which was swiftly followed by a similarly worded Turkish statement announcing it was suspending new US non-immigrant visa applications — highlights the crisis in the bitter relationship between the US embassy in Turkey and the Turkish government. Turkish officials and pro-government newspapers have regularly accused US diplomats and their colleagues of supporting Mr Gulen, terrorist groups and last year’s failed coup in Turkey.
“De-escalation is likely in the short term, but the underlying malaise in the bilateral relationship will continue nonetheless,” said Wolfango Piccoli at Teneo Intelligence, a UK-based consultancy.
But given the level of anti-Americanism in the country, he said, “it will be very difficult for Erdogan to back down and immediately cancel the detention warrants of the US personnel without suffering a further blow to his … domestic prestige.”
Concerns about the long-term economic impact of the US move come at a fragile time for the Turkish economy. While growth has been bolstered by Ankara’s largesse in the form of billions of dollars in new credit, Turkey’s current account deficit could rise to as much as 5 per cent of GDP by the year end, and the economy is dependent on global hot money financing that now adds up to almost 70 per cent of inflows, according to Tim Ash, emerging markets senior sovereign strategist at BlueBay Asset Management
“The central bank will need to move very quickly to calm market sentiment. If the lira continues to see selling pressure, it will have to move quickly to hike policy rates in defence of the lira,” Mr Ash said in a note to clients.
“Given Erdogan’s dislike of interest rates/usury, there might be political pressure on the bank to hold back from a conventional response. If that proves to be the case, then the lira might end up taking the strain,” he added.
While US-Turkey trade is far lower than that between the country ant the EU, investor sentiment about Turkey could deteriorate if the ban remains in place for a long period of time.
Turkey needs overseas financing in excess of 27 per cent of its GDP each year just to roll over loans taken out during a credit-fuelled construction boom that has driven its economy for about a decade.