ANKARA: The Turkish lira slumped to a record low on Tuesday, despite the central bank warning it has a war chest of up to $40 billion to defend the currency amid turmoil for emerging economies.
The lira plunged to 2.0372 to the dollar at the close from 1.9920 late Monday when the central bank sold $350 million in defence of the lira.
The Istanbul stock market closed down by 4.73 percent, having dropped 1.24 percent on Monday and 6.0 percent last week.
The head of the central bank Erdem Basci mixed defiance with reassurance, saying that the foreign exchange reserves would "never" be exhausted, that interest rates would be contained and that the pressures were a temporary squall.
And in remarks reported by local media, he was reassuring on the outlook for achieving the target for growth this year, and on the prospects for a reversal of a surge in Turkey's borrowing costs.
However, in July, as pressures built up, the central bank reversed a recent rate cut and stressed that it would tighten monetary conditions and crimp credit.
Last week the government blamed the US Federal Reserve central bank for spreading uncertainty through emerging economies.
Turkey is being battered by an exodus of capital from emerging economies in Asia, Latin America, Russia and South Africa as investors pull out some funds after signals of a tightening of US monetary policy.
"The current state of the foreign currency is temporary," Basci said. "We will strongly defend the value of the Turkish lira."
He added that he would not be surprised if the lira rallied to 1.92 to the dollar, or even stronger, at the end of this year.
"The central bank will never run out of net reserves," he said, revealing that it currently had about $40 billion (30 billion euros) to defend the lira.
In July, the central bank announced urgent measures to support the lira, including a tightening of monetary policy and intervention on the foreign exchange market.
The bank is estimated to have sold $8 billion to boost the value of the national currency.
Basci also forecast that the government's long-term borrowing cost would fall to single digits after the yield on 10-year government bonds surged to 10.58 percent last week on the secondary market.
The pressure on the economy has been building up in recent months and continued last week despite a decision by the central bank to raise its overnight rate by 0.50 percentage points to 7.75 percent, having raised it by 0.75 points at the end of July.
'Believe in me'
Basci said that the central bank would occasionally apply monetary tightening but the overnight interest rate would not go below 6.75 percent and that it would not climb over 7.75 percent by the end of the year.
However, analysts warned that those measures were too complex and in any case were unlikely to be enough to stabilise the markets. Some said they expected the central bank to hold a special policy meeting within a few days.
Finansbank economist Gokce Celik said the central bank chief's comments made it crystal clear that the bank "is determined to take bold actions in order to defend the currency."
But she warned that relying mainly on FX sales was a "fragile strategy against a backdrop of upward adjusting global interest rates."
The central bank, statutorily independent, has been under pressure from the government which had said repeatedly that the bank would do everything necessary to hold interest rates down to sustain growth.
Basci signalled that the interest rates would not rise markedly in the coming period.
"Believe in me and win," Basci said.
Analysts say that Turkey, in addition to being vulnerable to the external financing climate and slowdown in capital inflows, is also unduly dependent on credit and generated a worrying deficit on the balance of payments on current account.
After achieving strong economic growth of over 8.0 percent in 2010 and 2011, the government is now expecting growth of 4.0 percent.
"It's my personal estimation that we can sustain a growth of between 3-4 percent at the end of the year," Basci said.
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