* Lira back to pre-rate hike levels
* Moody's says pressure on currency to persist
* Erdogan pledges "plan B" for economy
* Slowing growth could hit him at polls
By Asli Kandemir
ISTANBUL, Jan 31 Turkish households and firms
are hoarding dollars, suggesting they have little faith the lira
will be spared a further emerging markets sell-off despite a
massive rate hike this week.
It is adding to pressure on Prime Minister Tayyip Erdogan as
The central bank raised interest rates by around 500 basis
points at an emergency meeting on Tuesday despite Erdogan's
vocal opposition, stunning markets and causing a spike in the
But the lira has since erased much of those gains, returning
to where it was just before the rate hike. It is still some way
from Monday's record low of 2.39, however, trading at 2.2735 to
Locals' forex holdings rose 2 percent to $122 billion in the
week to Jan. 24, jumping 13 percent year-on-year, according to
data from the central bank released on Thursday, suggesting they
are not selling dollars as they did in the past in currency
crises to benefit from a cheaper lira.
"Corporates have started buying forex for hedging purposes
as they think the lira will not appreciate," said a senior forex
manager at an Istanbul bank.
"Moreover, individual investors and households - who used to
sell as much as $10-15 billion whenever the lira depreciated -
are hoarding dollars and even increasing their holdings, piling
extra pressure on the lira," he said.
Ratings agency Moody's said on Friday the pressure on the
currency was likely to persist despite the central bank's
actions, which it said had also significantly weakened Turkey's
"Locals continue to accumulate FX," said Istanbul-based
TEB-BNP Paribas strategist Erkin Isik, estimating Turks' total
forex holdings had risen some $5 billion in the past three
"It will be more difficult for the central bank to reverse
this mood of local investors, if global risk sentiment remains
weak," he said.
RACE AGAINST TIME
Erdogan has said "a Plan B or a Plan C" for the economy may
be announced by the government in the coming days or weeks,
although his ministers have given no details, beyond saying
capital controls are out of the question.
The lira fell 17 percent in 2013 and extended its slide this
year as a graft scandal hit the government, heightening investor
concern about political stability just as a gradual end to U.S.
monetary stimulus dampened appetite for emerging market assets.
The slump means Turks now need more than twice as many lira
to buy dollars as they did at the currency's peak six years ago,
hitting their pockets as they prepare to vote in a cycle of
local, presidential and general elections beginning in March.
The lira's slide has also left Turkish firms with foreign
debts badly exposed, forcing them to scrap some investments at a
critical time as the government battles the corruption scandal
and tries to revive economic growth.
Turkey's leading business group TUSIAD estimates that within
just one month Turkish firms' foreign debt has risen 25-30
percent due to the currency weakness and higher risk premiums
which push up borrowing costs.
The higher borrowing costs have also raised concerns about
banking sector profits. The banking share index was
down 2.3 percent in Istanbul on Friday, underperforming a 1.4
percent decline in the main stocks index.
All this bodes ill for an economy which has seen growth
rates of 9.2 percent in 2010 and 8.8 percent in 2011 shrink to
just 2.2 percent in 2012 and a projected 3.6 percent last year.
Erdogan has built his reputation around economic success
since coming to power in 2002, transforming its reputation after
a series of unstable coalition governments in the 1990s ran into
repeated balance of payments problems and economic crises.
He is now in a race against time, hoping the pinch will not
be felt before the key March local elections.