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Economy

Turkish economy cooling as foreign money exits

Lira sinks, bond yields surge on diplomatic, fiscal worries

Turkish consumers have tightened their purse strings.

ISTANBUL -- Turkey's currency and bond prices have plunged amid friction with the U.S. and investor concerns about government finances, dimming the outlook for an economy where foreign capital is vital to growth.

The lira has softened more than 10% against the dollar this year to record low territory in the 3.9 range. A seafood importer here lamented the economic downturn that has accompanied the currency's slide, noting that many businesses have no cash on hand and that trading and manufacturing companies alike are keeping spending to a minimum.

The lira's weakness owes mainly to strained relations with the U.S. over such issues as the situation in Syria and last year's unsuccessful coup in Turkey. Speculation that the upcoming U.S. trial of a Turkish businessman charged with violating sanctions against Iran could develop into a financial and economic scandal has also served as fodder for lira bears.

Since Turkey relies on oil and natural gas imports, the pickup in crude oil prices has widened the country's current-account deficit. Repeated hikes to gasoline prices have helped drive inflation that has come in above 10% for three straight months, reaching 11.9% in October.

Interest rate hikes are the usual prescription for curbing inflation and shoring up a weak currency. But with President Recep Tayyip Erdogan insisting that high rates are to blame for high inflation, the central bank's hands are tied.

These issues have spurred investors to exit Turkish bonds and equities in droves. The yield on two-year Turkish government bonds reached 14% at one point as prices plunged, surging past debt yields in other major emerging markets such as India and Brazil. Stocks have also given up some gains from a rally that lasted most of the year.

Concerns are growing over lax fiscal discipline. The government is already running up against its effective annual borrowing limit of 52.2 billion lira ($13.4 billion) after tapping 46.5 billion lira in just half a year. The legislature will approve as early as Tuesday a measure raising the ceiling. The central government's budget deficit is expected to widen to 2% of gross domestic product this year from 1.1% in 2016.

Overseas borrowing plays a significant role in Turkey's economy. Debt owed to foreign creditors by the public and private sectors doubled over a decade to $432.3 billion at the end of June. But foreign investors are growing pickier as the U.S. and Europe scale back monetary easing, and Turkey's twin current-account and fiscal deficits make it a prime target for a retreat.

Though economic growth is seen meeting the government's 5.5% target this year, it is widely expected to slow to around 4% in 2018.

Erdogan and U.S. President Donald Trump spoke by phone Friday about mending fences. According to the Turkish side, Trump promised to stop arming Kurdish fighters in Syria, long a sticking point for Turkey. But the news failed to move the lira. With Erdogan likely to pander to nationalistic voters with more inflammatory rhetoric against the U.S. and Europe ahead of the 2019 presidential election, prospects look dim for real improvement in relations between Ankara and Washington.

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