Marc Jones
Saturday April 15, 2023
LONDON — Turkey’s lira is likely to drop sharply and could near 30 to the dollar following next month’s elections, bankers at JPMorgan have predicted, if it looks like only modest changes will be made to its unorthodox economic policies.
They
mark a fork in the road for both Turks battered by an inflation-driven
cost of living crisis and for international investors, many of whom have
bailed out of the country amid recurring bouts of market turmoil in
recent years.
JPMorgan’s
analysts said that macro adjustments were expected regardless of the
results but laid out two scenarios based on the degree of commitment to
more orthodox policies, such as interest rate rises to cool inflation.
In
a “strong commitment” scenario they predicted the lira would initially
fall to 24-25 to the dollar and to 26 by year end compared to around 19
currently.Benchmark government bond yields, which drive borrowing costs in the economy, would jump to 25%.
“Initially,
lira depreciates, driven by pent-up pressures of the large stimulus
ahead of the elections. As financial repression is relaxed, locals
increase FX portfolios, while foreigners wait for better valuation entry
points.”
If
the shift towards more orthodox polices looks like being more modest,
however, the lira could drop to close to 30 to the dollar by year end
albeit with a slower initial drop while bond yields were unlikely to
adjust much in this scenario.
“A tactical assessment will therefore be needed and we expect elevated volatility,” JPMorgan’s analysts said.
They
cautioned that, even with best intentions, the path to disinflate the
economy will be protracted, while it was likely that the central bank
would also aim to rebuild its FX reserves.
They
added that only a modest return to orthodox macroeconomic policies,
including a slower pace of credit growth, some lower levels of financial
repression and some path to rebuilding FX reserves, was “unlikely to
inspire capital inflows” meaning the lira would “likely remain on a more
protracted depreciation path.”
They
estimated the lira’s real effective exchange rate (REER), which takes
into account prices and measures its value against other currencies
whose countries Turkey does a lot of trade with, was now about 32% below
its “fair value.”
“However, initial real appreciation will be driven primarily by prices, with little scope for FX spot appreciation.” (Reporting by Marc Jones)