© Reuters. FILE PHOTO: A woman holds Turkish lira banknotes in this illustration taken on May 30, 2022. REUTERS/Dado Ruvić/Illustration
Written by Mark Jones
LONDON (Reuters) – Bankers at JP Morgan (NYSE) have predicted that it will likely fall sharply and could approach 30 per dollar after next month’s election, if it appears that only modest changes will be made to its unorthodox economic policies.
Turkey’s closely contested presidential and parliamentary elections on May 14 are perhaps the most significant in the republic’s century-long history.
It represents a crossroads both for Turks hurt by an inflation-induced cost-of-living crisis and for international investors, many of whom have moved out of the country amid repeated bouts of market turmoil in recent years.
JPMorgan analysts said that macro adjustments were expected regardless of the outcome but they built two scenarios based on the degree of adherence to more traditional policies, such as higher interest rates to calm inflation.
In the “strong commitment” scenario, they expected the lira to decline initially to 24-25 to the dollar and to 26 by the end of the year, compared to about 19 currently.
Benchmark government bond yields, which drive the economy’s borrowing costs, will jump to 25%.
“Initially, the lira depreciates, driven by the pent-up pressure of the big pre-election stimulus. As financial repression eases, locals increase foreign currency portfolios, while foreigners wait for better entry points for assessment.”
If the shift towards more traditional policies looks more modest, the lira could drop to around 30 to the dollar by the end of the year albeit with a slower initial decline while bond yields are unlikely to adjust much in this scenario.
“So there will be a need for a tactical assessment and we expect increased volatility,” JPMorgan analysts said.
They warned that, even with the best of intentions, the road to emptying the economy will be a long one, while it is likely that the central bank will also aim to rebuild its foreign exchange reserves.
They added that only a modest return to traditional macroeconomic policies, including a slower pace of credit growth, some lower levels of financial repression and some path to rebuilding foreign exchange reserves, “is unlikely to inspire capital inflows” which means that the lira “is likely to It remains on a long-term depreciation path.”
They estimated that the lira’s real effective exchange rate (REER), which takes into account prices and measures its value against other currencies with which Turkey frequently trades, is now about 32% below its “fair value”.
J.P. Morgan said, “The scenario of returning to traditional macroeconomic policies may put the lira on a real rise, returning to its fair value.”
“However, the initial real rally will be primarily price-driven, with little room for an immediate rally in FX.”