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HomecurrenciesTurkish lira's dive wrecks balance sheets, deters foreign investment

Turkish lira’s dive wrecks balance sheets, deters foreign investment

The lira's dive to a record low has badly exposed Turkish firms with foreign debts, forcing them to scrap some investments at a critical time as the country weathers a corruption scandal and tries to revive economic growth.

The weak currency is also denting profits made by foreign firms in Turkey, and deterring overseas investors who fear that uncertainty over monetary policy and domestic politics is creating too great a risk.

(Read more: Thank Turkey for the euro's spike versus dollar)

Emerging markets across the globe are suffering a violent shake-out due, largely due to the U.S. Federal Reserve's decision to slow its program of printing money, much of which had flooded into emerging economies in search of better returns.

But the problems of Turkey, once an investors' favorite, are much deeper than most, and many of them are home grown.

The lira has lost about 16 percent against the dollar and 17 percent against the euro since Dec. 17, when the arrest of the sons of three cabinet ministers exposed a corruption investigation which threatens Prime Minister Tayyip Erdogan and his government's standing.

That is more than double the losses suffered by the lira's emerging market peer, the South African rand. Over the same period, it is down 7.45 percent against the dollar and 7.1 against the euro.

Erdogan has hit back at the police and judiciary, and accused a U.S-based Islamic cleric who has strong influence in Turkey of orchestrating the inquiry to unseat him.

Exacerbating this tense environment is a central bank which has persistently refused to raise interest rates to defend the currency. This followed strong public opposition to a hike from Erdogan, who is keen to boost economic growth as elections approach, forcing the central bank to burn through its foreign currency reserves to shore up the lira.

(Read more: Further gloom in store for lira)

The bank will hold an emergency monetary policy meeting on Tuesday, after its attempts to defend the lira with more subtle methods than a rate increase have all ended in failure.

All this bodes badly for an economy which has seen its stellar 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. The government badly wants more healthy growth in 2014, a year with local elections in March and a presidential poll in August.

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