(Bloomberg) — Turkish authorities are stepping in to stabilize markets after the detention of President Recep Tayyip Erdogan’s most powerful opponent sparked a sharp selloff and undermined confidence in the country’s policy path.
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The lira weakened 0.7% against the dollar on Monday after last week’s 3.1% drop, while other assets fared better. Istanbul-listed stocks gained as much as 3.8% and the price of protection against non-payment on Turkish government bonds retreated from a 12-month high.
The moves come as Turkey’s top economy officials are discussing a string of measures to help defend the lira, according to people with direct knowledge of the matter. The next steps were discussed in meetings led by Treasury and Finance Minister Mehmet Simsek over the weekend, the people said on condition of anonymity as the discussions are private.
One step considered is lowering the taxes on lira deposits and funds to encourage savings in the local currency, they said. The discussions stem from a major fallout in the lira, stocks and bonds over Istanbul Mayor Ekrem Imamoglu’s arrest last week, which fueled protests. Turkish police detained more than 1,000 people at demonstrations since March 19.
“The common denominator of the steps taken is to increase the attractiveness of the lira,” said Murat Gulkan, the chief executive officer of OMG Capital Advisors. “Reducing withholding tax would have the same effect on investors as raising interest rates as the risk premium rises. In the face of these political risks, it’s vital to keep the exchange rate stable. But this comes at a cost.”
Turkish lenders increased foreign-currency sales on the market in past days, behavior typical for periods when the central bank intervenes to support the lira by selling chunks of the country’s currency reserves.
Imamoglu’s battles reminded investors of Turkish risks after the country has largely withdrawn from hand-management of various markets since mid-2023. Simsek’s push toward more orthodox economic policies, and a gradual depreciation of the lira, had been applauded by investors and helped Turkish residents reduce holdings of dollar-denominated assets.
“Policymakers have made great strides by embracing economic orthodoxy” which has led to a “broad rally as inflows accelerated,” said Mohammed Elmi, a senior portfolio manager at Federated Hermes Limited. But the mayor’s arrest has boosted the “political risk premium” and stoked concerns over “potential dollarization among locals,” he said.