Turkey’s lira – expect the slide to continue

One of the most prominent victims of the emerging-market sell-off has been Turkey. The Turkish lira is at record lows against both the euro and the dollar it has fallen by 32% against the latter in a year.

The latest cloud on the horizon is the end of coalition talks, following an inconclusive election in June. New elections are due to take place in November. "The big risk is that we end up having repeat elections and nothing changes. That introduces a lot of uncertainty," says Manik Narain of UBS.

To make matters worse, Turkey's increasingly authoritarian President Recep Erdogan has now stepped up a military campaign against Kurdish separatists, in an apparent bid "to rally support for the government and thus salvage his ambitions for greatly expanded powers".

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Meanwhile, growth has slowed to around 3% a year and inflation is stuck around almost 7%. The falling currency has stoked price rises, and the central bank looks set to raise interest rates to dampen inflation and shore up the currency crimping growth further.

Turkey also has a current-account deficit of almost 6% of GDP, so it needs foreign money to bridge this gap with the rest of the world. Much of this capital is made up of short-term investments in stocks or bonds, or "hot money". This money tends to turn tail when emerging markets fall out of favour, so a key source of support for the economy goes into reverse.

The lira's slide looks set to continue.