UPDATE 1-Turkish lira weakens as current account gap widens

Tue Jan 14, 2014 11:57am EST

Related Topics

* Current account deficit, politics weigh on lira

* Central bank plays down likely impact of Fed tapering (Adds central bank comments, latest on graft probe, closing prices)

By Dasha Afanasieva

ISTANBUL, Jan 14 (Reuters) - Turkey's lira weakened on Tuesday after data showed the current account deficit had widened in November while concerns about the impact of a wide-ranging corruption scandal continued to weigh on sentiment.

Prime Minister Tayyip Erdogan described a corruption investigation, which has resulted in three ministerial resignations, as a "black stain on Turkey's democratic history" and a worse betrayal than any of the military coups of past decades.

The Turkish lira has weakened more than 7 percent since mid-December, when in a series of morning raids dozens of people including businessmen close to the government and the sons of ministers were arrested. The raids coincided with raised expectations for a scaling back of the U.S. stimulus programme.

Turkey's current account deficit widened to $3.94 billion in November from $2.89 billion a month earlier, data showed, narrower than had been feared but not enough of an improvement to cheer the market.

The lira had weakened to 2.1830 against the dollar by 1606 GMT from 2.1765 late on Monday.

TURKEY'S "ACHILLES HEEL"

"I guess this just affirms that the pace of improvement is just not moving fast enough to quickly eradicate concerns over Turkey's key Achilles heel, the current account deficit," said Timothy Ash, head of emerging markets research at Standard Bank.

"The lira looks set to go weaker still until the central bank opts to tighten monetary policy in a more meaningful way."

Turkey depends on cheap capital inflows to finance the current account deficit, running at around 7 percent of GDP, leaving it particularly exposed to any slowdown in inflows triggered by the scaling back of the U.S. Fed's bond buying.

The U.S. Federal Reserve has said it will cut its $85 billion-a-month bond-buying programme by $10 billion in January, but Turkey's central bank forecast only a slight impact on markets, saying it believed the measure was already largely priced in.

"The Fed tapering already had its impact on currencies, on flows, so the remaining impact is quite low," central bank deputy chairman Turulay Kenc said on Tuesday.

"The impact when the Fed actually starts tapering will be much lower than what we observed in May 2013 or recently."

Despite the lira's decline, the central bank has so far refused to hike rates, instead opting to tighten monetary policy through cancelling repo auctions and trying to support the currency through dollar sales.

The main Istanbul index closed almost flat on Tuesday, up 0.02 percent at 68,072.51 points, compared with the main global emerging market index which was a quarter of a percentage point lower.

The yield on Turkey's 10-year benchmark bond inched up to 10.05 percent from 10.04 percent late on Monday. (Editing by Nick Tattersall/Gareth Jones)

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