Markets tumbled and the lira slumped to an all-time low against the dollar in late December amid a major corruption scandal. The meltdown highlights concerns about political risk
Markets in Turkey tumbled in late December amid a major corruption and bribery scandal that shook the country and also due to the Fed’s Dec. 18 announcement that it will start drawing down its multibillion-dollar bond-buying policies in 2014.
As of the morning of Dec. 26, the lira was below TL2.18 to the dollar. Turkey’s benchmark two-year bond yields surged to 10 percent and the 10-year benchmark bond yields rose to 10 percent, highest in the past three months, as of Dec. 26. Analysts are not exactly optimistic about 2014.
International banking giants have been issuing warnings to their investors to watch for key political risks in Turkey in 2014, which will see a municipal and a presidential election. Foreign investors have been calculating risks in Turkey based on the stability of a single-party government, but recent political fluctuations — most particularly Turkey’s corruption probe in which four ministers are allegedly implicated — indicate that more investors will be leaving the Turkish market. Analysts say the Fed’s tapering of its quantitative easing program added to political risk concerns might cause the lira to slump even lower than TL 2.25 against the dollar.
Fed announcement on
bond-buying
The Fed on Dec. 18 announced that it will begin tapering its $85 billion monthly purchases of Treasuries and Treasury mortgage-backed securities to $75 billion by $5 billion each starting in January. The Fed did not change its position on keeping a key short-term interest rate near zero, stating that it would not consider increasing the rate until US unemployment has reached at least 6.5 percent especially if projected inflation continues to run below the 2 percent goal.
But what does the Fed’s decision exactly mean? The Fed announced a cutback in its bond-buying program but it also dispelled the notion that this would mean it would raise short-term interest rates sooner than expected. The Fed’s announcement shows that Fed officials are gaining confidence in the strength of the economic recovery but they also focus on the costs of a prolonged bond-buying program might bring. The announcement also indicates that further limited tapering is likely in future meetings. The tapering decisions, as before, will depend on the inflation and unemployment rates.
Fed officials expect to raise rates in the second half of 2015 and early 2016. They have successfully balanced their decision to trim bond-buying and still offer guidance for the period ahead, which, for the markets, erases out an important source of ambiguity. Gold, perceived as a safe haven by most investors, feel harshly after the Fed’s tapering announcement. Gold prices had slid to $1,200 — lowest since June — as of Dec. 19.
