The Turkish lira (YTL) had the biggest weekly decline against the dollar in more than two months after the country's highest court threw out a law liberalizing the wearing of Islamic headscarves, fueling speculation the ruling party may be banned. The depreciation of the YTL, while helping exports, is also hurting some companies, as first quarter results of three companies show.
The YTL fell to a two-week low after the Constitutional Court ruled Thursday that legislation allowing students to wear headscarves was contrary to the secular system. The case signaled prosecutors may try to remove Prime Minister Tayyip Recep Erdoğan's Justice and Development Party (AKP) from office.
“The verdict is very important as it signals the possible closure of the ruling party,” said Serhan Çevik, an economist at Nomura International in London. “What comes next is highly unknown. We now face all sorts of political uncertainty.”
The YTL fell 2 percent, the most since the week ending March 28, to 1.2426 per dollar by 5:55 p.m. Friday in Istanbul. It earlier dropped to 1.2452 per dollar, the lowest level since May 27. The currency declined 3.3 percent this past week to 1.9495 per euro.
Turkish government bonds fell, pushing yields to an 18-month high Friday, according to ABN Amro Holding's index of the country's securities.
Investors start betting:
The headscarf issue forms the centerpiece of a prosecutor's case to ban the AKP and exclude 71 of its leaders from politics for five years for trying to undermine secularity.
“The headscarf decision will maintain political uncertainty, with negative implications for investor sentiment,” Charles Robertson, an economist at ING Groep in London, wrote
in note to clients Friday. There's a 55 percent chance the ruling party will be removed from office, 40 percent odds it will lose funding and a 5 percent possibility of the case being dismissed, Robertson claimed.
Some lawmakers of the AKP party said a snap general election should be called after the court's ruling, Milliyet newspaper reported Friday.
“However, I think the downside to the YTL is limited because it has already depreciated a lot against the trade-weighted currency basket and because high interest rates provide support,” said Çevik.
Turkey's 15.75 percent main rate is tied for the highest in Europe with Serbia, making the YTL a target for the so-called carry trade, where investors borrow cheaply in currencies with lower rates and invest in higher-yielding assets elsewhere.
Koç, Tüpraş profits fall:
The fall of the YTL has hurt Koç Holding, Turkey's biggest company, Tüpraş, the nation's biggest energy company and Doğan Media Group, the country's biggest media company, as all three reported losses or fall in profits.
Koç Holding said first-quarter profit slid 20 percent as economic growth slowed and the YTL declined against the dollar. Net income was YTL 206 million ($166 million), Koç said in an e-mailed statement Friday. That compared with a profit of YTL 260 million in the year-ago period. Sales rose 23 percent to YTL 12.3 billion.
Koç owns Arcelik, Turkey's biggest appliance-maker, which said on May 26 that its first-quarter profit fell 28 percent as sales decreased.
Oil refiner Tüpraş, which Koç bought two years ago, also said Friday first-quarter profit fell 68 percent to YTL 37.9 million ($30.5million) from YTL 117.9 million a year earlier. The company's borrowing costs climbed as the YTL lost 13 percent against the dollar in the first quarter. The fall increased Tüpraş's cost of financing its debt denominated in the
U.S. currency. Financial expenses totaled YTL 334.9 million, including YTL 226.4 million of foreign exchange losses from crude oil purchases and YTL 51 million from loans.
Slowdown in growth:
Turkish economic growth slowed to 3.4 percent in the fourth quarter, the slowest pace in more than five years.
Koc had net cash reserves of $750 million as of June 1 and plans to increase that to more than $1 billion after completing the sale of insurance units, Koç Chief Executive Officer Bülent Bulgurlu said in the statement. Operating profit at the company rose 42 percent, he said.
The Istanbul-based company has joint ventures with Ford Motor and Fiat that increased exports to European countries in the period.
Koç shares have declined 39 percent this year, valuing the company at YTL 6.79 billion.
Tüpraş shares have dropped 10 percent this year, valuing the company at YTL 7.7 billion.
On Thursday, Doğan Media Group (DMG) had reported a net loss of YTL 127.4 million ($103 million) for the first quarter. The loss was mainly due to net foreign exchange losses of $72 million, Hasan Şener, a senior analyst at Oyak Securities said Friday.