Why Politic dammages the Economy?

Turkish lira: how bad can it get?

Political instability and security fears in Turkey following a bloody 2016 have driven the lira to record lows.

Parliament's debate over a controversial new constitution to give President Recep Tayyip Erdogan greater powers has fuelled economic worries to make lira the worst performing of the emerging-market economies.

The central bank has tried to step in but analysts warn its firepower may be limited and the lira may further plummet.

- What is causing the slump? -

Deadly attacks, an economic slowdown and political uncertainty have spooked the markets. On top of that, higher inflation has sparked selling and the currency has been dragged down by the prospect of more protectionist economic policy by US President-elect Donald Trump.

Standard and Poor's and Moody's both downgraded the country's credit rating to junk status in 2016. And this week Moody's warned the security situation was likely to weigh on the economy and cause a "general worsening of the investment climate", putting Turkey's banks under pressure.

Analysts say investors are also increasingly worried about interference in monetary policy under Erdogan who has repeatedly pressured the central bank to lower interest rates.

- What has been done to recover losses? -

The central bank tried to break the lira's fall in November by raising interest rates for the first time since 2014.

On Tuesday it relaxed foreign exchange rules to inject $1.5 billion into the market, but the move fell flat.

Experts said the bank will be aware such measures can only have limited effect: it tweaked required reserve ratios four times last year, but on three occasions the lira continued to weaken.

- How long could the decline continue? -

"Nobody really knows," admits senior market analyst Ipek Ozkardeskaya at LCG, warning the lira could go "way lower" without "immediate action from policy makers". As it stands, the lira is "racing to the bottom".

NFS Macro analyst Nick Stamenkovic says there is "increasing pressure from Mr Erdogan and his cohorts to cut rates, compounding the problems for the lira amid mounting external constraints".

Analysts say the massive crackdown in Turkey following last July's failed coup is affecting the business sector, which could prompt capital flight.

The political uncertainty is likely to drag on for months. If parliament passes the new draft constitution, it will be put to a referendum in late March or early April.

Ratings agency Fitch is expected to review its assessment of Turkey soon and may also downgrade its credit rating to junk.

- Can the slide be stopped? -

Erdogan has described himself as an "enemy" of interest rates, but analysts say the central bank will have to hike them again, and soon.

William Jackson of Capital Economics says it is "increasingly likely" the bank will have to raise official interest rates when it next meets on January 24.

According to City Index research director Kathleen Brooks, "a bold move from the Turkish central bank, like a large, one-off rate hike would probably be the only thing that would boost the currency.

"But even then, it may only have a limited effect."

Analysts at Renaissance Capital believe everything depends on whether Turkey's situation stabilises after the referendum on the constitution.

In a best case scenario, growth could rise to 4-5 percent in 2018, but if there is no stability, the exchange rate could hit "4-5 Turkish lira to the dollar".

Nomura International said it expects to see a hike of 25?50 basis points from the central bank in January -- far lower than what it says is a needed increase of 350?400 basis points.

Should the bank choose not to raise interest rates at all, the lira risks dropping in real terms to lows "last seen in the aftermath of the 2001 crisis" when Turkey flirted with financial meltdown,